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Author: 
 
 Dicksee, Lawrence Robert 
 
 Title: 
 
 Fundamentals of 
 manufacturing costs 
 
 Place: 
 
 London 
 
 Date: 
 
 1919 
 
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 .Dicl^8ee» Lawrence Robert, 1864- 
 
 Tho fundarentals of inanufaoturing co.its, by 
 Lawrence R, Dicksce «,, with an appendix consist- 
 ing of a report issued by the Federal trade com- 
 mission of \rashington, U. S. A., on 1st July 1916. 
 London, Gee, 1919. 
 
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# 
 
 THE FUNDAMENTALS 
 
 OF 
 
 MANUFACTURING COSTS. 
 
 BY 
 
 LAWRENCE R. D1CK3EE, M.Cu.n., F.C.A 
 
 (PfoJc^iOt -'/ .hiOiutL' f: i'!i I i/w: Ph-. , ■Jr;'.uni:,i'(i"n n the I' nivcr-.-ily -jf L-jnUo"). 
 
 WllH 
 
 AN APPENDIX 
 
 OJiisistiiifr ol a Report issued bv 'Jbc Fei>f.ral Irade (om mission 
 
 cl VVcishin^Lon, U.S. ". , un 
 
 ]uly 1916. 
 
 Price 1/6 net. 
 
 '? 
 
 
 IV- 
 
 London : 
 •■}ee & Co. (PuBLisHKii.^) LiiJ., 34 MoouuATu; Street, K.C. 2 
 
 1 910. 
 
Columbia Winibtviitp 
 
 in tfie Citp of ^eto f^orfe 
 
 LIBRARY 
 
 School of Business 
 
♦ -• 
 
 THE FUNDAMENTALS 
 
 OF 
 
 MANUFACTURING COSTS. 
 
 BY 
 
 LAWRENCE R. DICKSEE, M.Com., F.C.A. 
 
 (Professor of Accounting and Business Orgamsation in the University of London). 
 
 WITH 
 
 AN APPENDIX 
 
 Consisting of a Report issued by the Federal Trade Commission 
 of Washington, U.S.A., on ist July 1916. 
 
 London : 
 GifiE & Co. (Publishers) Ltd., 34 Mooegate Street, E.G. 2 
 
 1919- 
 
e> 
 
 v/^ 
 
 
 
 li; 
 
 
 
 
 i 
 
 4^ ;r 
 
 \'^ 
 
 
 PREFACE. 
 
 The object of this little handbook is to draw 
 attention to, and to emphasise the importance of, a 
 Report issued by the Federal Trade Commission of 
 Washington, U.S.A., on ist July 1916, which (by 
 the kind permission of the Chairman, Mr. Edward N. 
 Hurley) I am able to reproduce in the form of an 
 Appendix. I have not attempted to deal exhaustively 
 with the subject of manufacturing costs generally, 
 but I have endeavoured to point out that what the 
 Federal Trade Commission is contending for in 
 connection with the costing methods of American 
 manufacturers applies almost equally to the manu- 
 facturers of this country, and I have added something 
 upon the subject of the treatment of overhead 
 charges which may prove useful in connection with 
 that branch of costing which seems to be least under- 
 stood, both in the States and here. 
 
 In the very nature of things anything like uniformity 
 of method is impossible in connection with Cost 
 Accounts. No " ready-made " system would satis- 
 factorily meet the requirements of any manufacturing 
 concern. Even in connection with the ordinary 
 financial accounts great diversity of methods are to 
 be found, and are necessary to meet varying circum- 
 stances. In the Cost Department such variations 
 must necessarily be even wider, and they are, if 
 possible, even more necessary. What I have attempted 
 to do, accordingly, has been first to emphasise 
 the need of accurate costing, and in the second 
 place to endeavour to discuss those fundamental 
 principles that must be dealt with before an adequte 
 system can be designed to meet the requirements of 
 any particular works. The application of principles 
 to practice is not, in my judgment, a matter that 
 can usefully be dealt with in any book — certainly 
 not in a book of the size of the present volume. It 
 is a matter upon which competent expert assistance 
 should always be sought, and the manufacturer may 
 rest assured that, if he proceeds upon these lines, he 
 will in the long run be proceeding upon the most 
 economical lines. 
 
IV. 
 
 PREFACE. 
 
 11 
 
 Further, I should like to add that no really adequate 
 system of Cost Accounts is likely to be produced 
 unless there is complete collaboration between the 
 practical manufacturer on the one hand and the 
 professional accountant upon the other. Neither 
 can hope to produce a really satisfactory system of 
 Cost Accounts unaided : the manufacturer, because 
 he has had no training in accounting methods, and, 
 naturally, does not know the best and most certain 
 means of arriving ai the results he requires ; the 
 professional accountant, because he has no knowledge 
 of — or at least no expert knowledge of — manufacturing 
 processes and practical working conditions, and can 
 only work to the best advantage when these have been 
 properly explained to him. Failing that, he will 
 devise a " ready-made " system that does not " fit " 
 the actual working conditions, and. is, therefore, 
 bound to prove unworkable. 
 
 In conclusion, I should like to explain an apparent 
 discrepancy in the text to which my attention has 
 been drawn. Upon page 3 I have emphasised the 
 fact that no satisfactory Cost Accounts are likely to 
 be arrived at that are not based upon double-entiy, 
 and that no complex system is possible without the 
 aid of sectional balancing. Elsewhere (on page 99 
 of my recently published book, " Office Machinery ") 
 I have referred to " the tyranny of the double-entry 
 " idea, with its smug complacency of a low ideal 
 "of perfection." This apparent inconsistency will 
 cause no difficulty to those who are acquainted with 
 my lecture on " Modern Accountancy Methods in 
 relation to Business Efficiency," which was repro- 
 duced in The Accountant on the 14th November 
 1914, wherein I stated that " a very superficial study 
 " of history is sufficient to show that the impression 
 " that perfection had been achieved (if only by a 
 " single individual) has often been responsible for 
 " the stagnation of some art or science for a generation 
 " or more. The fallacy of the supposed perfection 
 " of the double-entry system, as handed down to 
 " us by the Lombardy merchants of the fifteenth 
 " century, is that, so to speak, it views everything 
 " in one plane. It is about as true to nature as a 
 '* system of geometry which regards plane geometry 
 " as the only kind in existence, and ignores the fact 
 " that there is such a thing as solid geometry." 
 
 It may well be that, for the great majority of 
 business events, observations on a single plane are 
 
 i 
 
 ^^« 
 
 ^ » - 
 
 PREFACE. 
 
 V. 
 
 sufficient for practical purposes ; but it is, I think, 
 even more certain that, being incomplete (as they 
 necessarily are), observations that seem adequate to 
 one generation may be found seriously inadequte to 
 another generation of business men working under 
 very different conditions. To recognise the twofold 
 effect of every transaction is excellent so far as it 
 goes, but from the point of view of modern accounting, 
 and particularly from the point of view of Cost 
 Accounts, mere double-entry is often an incomplete 
 record. It is, of course, quite possible to keep 
 accounts by double-entry, and not to keep any Cost 
 Accounts at all. That is the kind of double-entry 
 that I refer to when I speak of " the tyranny of the 
 " double-entry idea with its smug complacency of 
 "a low ideal of. perfection." I am not for one 
 moment suggesting that there is a word to be said in 
 favour of so-called single-entry, but rather that mere 
 double-entry is often inadequate. Sectional balanc- 
 ing gives us as many double-entries as there are 
 Ledgers into which the Ledger system as a whole is 
 subdivided, and thus enables us to review matters 
 departmentally according to any desired basis of 
 classification, as well as from the point of view of 
 their effect upon the annual accounts of the 
 undertaking. 
 
 LAWRENCE R. DICKSEE. 
 
 Lincoln House, London, W.C.i. 
 10th October 191 ?• 
 
isi 
 
 ii 
 
 BY THE SAME AUTHOR. 
 
 Advanced Accounting (Fifth Edition) - - 21/4 
 
 Auditing (Tenth Edition) - _ _ _ _ 10/10 
 
 Bookkeeping for Accountant Students (Seventh 
 
 Edition) _ _ ____ ^j/^ 
 
 Bookkeeping for Company Secretaries (Fifth 
 
 Edition) ______ ^j^ 
 
 Bookkeeping Exercises for Accountant 
 
 Students (Third Edition) - - -3/10 
 
 Depreciation, Reserves and Reserve Funds 
 
 (Third Edition) - _ _ _ _ 3/10 
 
 Office Machinery : A Handbook for Progressive 
 
 Ofi&ce Managers _ - _ _ _ 10/6 
 
 {Published by Gee &> Co. [Publishers] Ltd., 
 34 Moorgate Street, E.C.) 
 
 Office Organisation and Management (with H. E. 
 Blair). (Third Edition) - - _ _ 
 
 [Published by Sir Isaac Pitman 6- Sons, Ltd., 
 I Amen Corner, E.C.) 
 
 The a. B.C. of Bookkeeping - - _ 
 Business Organisation - _ _ _ 
 
 [Published by Longmans, Green (~ Co., 
 39 Paternoster Row, E.C.) 
 
 Business Methods and the War - _ _ 
 
 [Published by the University Press, Cambridge.) 
 
 If 
 
 5/- 
 
 2/6 
 5/- 
 
 2/- 
 
 THE FUNDAMENTALS OF 
 MANUt^ACTURING COSTS. 
 
 So far as I can gather, there seems to be a some- 
 what widespread belief that Cost Accounts were 
 invented in the United States, and introduced into 
 this country by Sir S. H. Lever, K.C.B., when he 
 came over to place himself at the disposal of the 
 Ministry of Munitions. This impression is about as 
 reliable as are most popular impressions ; and it 
 would not be worth combating, but for the fact that 
 one never quite knows what may be the consequences 
 hereafter of wrong ideas concerning the history of 
 any important movement. 
 
 The pamphlet on " Fundamentals of a Cost 
 System for Manufacturers," which is reproduced 
 in the appendix, was issued on ist July 1916 by 
 the Federal Trade Commission, Washington (a body 
 somewhat analogous to one of the departments 
 of our own Board of Trade, e.g. the Census of 
 Production Department), consisting of Mr. Edward N. 
 Hurley (chairman), Mr. William J. Harris (vice- 
 chairman), and Messrs. Joseph E. Davies, Will H. 
 Parry, and George Rublee. But although an 
 official document, published by the Washington 
 Government Printing Office, it is given a distinctly 
 personal touch by the preface, signed by the chairman^ 
 which is in the following terms : — 
 
 To the American Manufacturer, 
 
 The Federal Trade Commission has tound 
 that an amazing number of manufacturers, 
 particularly the smaller ones, have no adequate 
 system for determining their costs, and price 
 their goods arbitrarily. It is evident that there 
 must be improvement in this direction before 
 competition can be placed upon a sound economic 
 basis. 
 
m 
 
 Iti 
 
 With the object of aiding in the improvement 
 of business generally, we have endeavoured in 
 this pamphlet to show briefly the importance of 
 accurate manufacturing costs, and the funda- 
 mental principles underlying them. I commend 
 it to your attention, and feel satisfied that if 
 you will read carefully, you will find many 
 helpful suggestions. 
 
 The pamphlet has been prepared under my 
 direction by Mr. Robert E. Belt, chief account- 
 ant, and Mr. R. W. Gardiner, assistant. 
 
 Trusting we may have your heartv co-opera- 
 tion, 
 
 I am, very respectfully yours, 
 
 (Signed) Edward N. Hurley. 
 
 Chairman. 
 
 It is difi&cult to imagine our own Board of Trade, 
 or any department thereof, issuing a blue-book 
 intended for the information of British business 
 houses accompanied by a similar dedication, but 
 there can be very little doubt that our Government 
 publications would be very much more widely read 
 if someone took ever such a little trouble to try 
 and make them more readable. 
 
 Before proceeding to discuss in detail this very 
 interesting pamphlet on " The Fundamentals of a 
 Cost System for Manufacturers"— which, be it noted, 
 does not attempt to go further than to lay down the 
 main principles upon which any satisfactory svstem 
 of manufacturing cost accounts must be based, it is. 
 I think, just as well to mention that the skeleton 
 system there described is by no means novel and does 
 not claim to be novel. It bears, indeed, a rather 
 remarkably strong resemblance to a system described 
 m Part III of my " Bookkeeping for Accountant 
 Students," which was first published in 1893. It is, 
 of course, exceedingly probable that no member of 
 the Federal Trade Commission has ever read this 
 book, in just the same way that, at the time I wrote 
 it, I had not myself read any other book upon Cost 
 Accounts. I draw attention to the matter simply 
 because it shows that we each, when trying to evolve 
 independently the basis upon which a system of 
 reliable Cost Accounts for manufacturers must be 
 founded, came — as it seems to me. necessarily and 
 irresistibly— to very much the same conclusions. 
 
 4 I i 
 
 No system of accounting can be satisfactory that is 
 not based upon double-entry. No complex system 
 of accounting is possible without the aid of sectional 
 balancing. Accordingly, Cost Accounts — which must 
 necessarily be voluminous to be of any use what- 
 soever — must be treated as an independent depart- 
 ment, and linked up with the general system of financial 
 accounts upon the lines of sectional balancing.* 
 
 If they are not so linked up, it is practically certain 
 that the results shown by the two sets of records will 
 not agree ; and, as time goes on, they will naturally 
 tend to drift further and further apart, in just the 
 same way — ^and for precisely the same reasons — 
 that books which are never balanced tend to become 
 more and more inexact. It seems unnecessary to 
 emphasise the fact that inaccurate accounts are 
 altogether useless. 
 
 That it should have been necessary for the Federal 
 Trade Commission to issue such a pamphlet as that 
 now under discussion shows, I think., sufficiently 
 clearly that only a minority of manufacturers in the 
 United States are keeping proper Cost Accounts, or 
 even understand what such accounts should consist 
 of. But it must be conceded that there is at least 
 as much scope for an educational campaign in this 
 -country, although far less hope that it will ever be 
 undertaken by a Government Department here. 
 Even if it were so undertaken, it would probably be 
 of little practical use, for the simple reason that it is 
 inconceivable that our Board of Trade (as at present 
 constituted) would ever issue a pamphlet at all upon 
 the lines of that published by the Federal Trade 
 Commission, and even more unlikely that any 
 •considerable number of British manufacturers would 
 read it if it were issued. 
 
 *The question has often been discussed — sometimes with much un- 
 necessary heat— as to whether "accountants" are the proper people to 
 keep cost records, or whether they ought not to be kept by a special 
 •class of " cost accountants " who are skilled in manufacturing 
 processes. To the impartial oilooker, the matter does not appear to be 
 of vital importance ; it is, however, essential that all kinds of accounting 
 records should be made by competent and experienced persons, suffi- 
 ciently acquainted with the real nature of the transactions they are 
 ■endeavouring to record, and it is of real importance that records which 
 inter aha provide the material upon which works management may be 
 criticised with intelligence should not be too much under the sole con- 
 trol of the Works Manager— «'.«. the accounting party. A separate Cost 
 Department, linked up with the Accounts Department upon lines of 
 -sectional balancing, seems to be the best — if not the only— way of uniting 
 M these conflicting requirements. 
 
During the past twenty years or so I have 
 had many opportunities of discovering what is 
 being done in this country in the direction of Cost 
 Accounts, and the view that I have formed is that 
 whiJe good costing has long been usual among the 
 basic industries, such as coal and iron, so far as 
 general manufacturers and contractors are concerned 
 It IS only quite recently that anything really serious 
 has been attempted upon anvthing like an extensive 
 scale. Even now, there are "quite a large number of 
 business men who think they are working upon up- 
 to-date lines who have literally no conception of 
 what Cost Accounts are. In many cases what are 
 called "Cost Accounts" are calculations, made at 
 arbitrary intervals— when specially called for-^ 
 estimating, or guessing the cost of some particular 
 article or service, wholly without reference to the cost 
 of other articles produced or services rendered • 
 calculations which have absolutely no connection 
 whatever with the accounting records proper, and are 
 at best but fragments of what a proper costing system 
 should be. with all the attendant dangers of inaccuracy 
 in other ca.ses. where something called by the name 
 ot Cost Accounts " is continuously compiled I 
 have found, upon inquiry, that it is a record as' to 
 cost of labour only, or (still more rarely) a record ol 
 the cost of labour and materials, i.e. prime costs 
 the whole question of overhead charges, or oncost' 
 bemg disiegarded, as being "too complicated'' 
 tor treatment in actual practice.* 
 
 I do not think it would be overstating the case to 
 say that, in the majority of instances, manufacturers 
 m this country, even when they think they are keep- 
 ing Cost Accounts., do not keep them upon any recog- 
 msed system of accounting, and do not keep them in 
 such a form as to be capable of being reconciled with 
 the financial books. 
 
 There is no harm whatever in the Cost Accounts 
 being organised as a separate department. Indeed 
 there is. I think, a good deal to be said in favour of 
 such an arrangement ; but however the department 
 may be organised it is essential, seeing that it deals 
 with records of events, that it should be based upon 
 
 v^hlt^^Prfrnf Pn'J^^"" se^^~t7be^v very general agreement as to 
 iteV^lUTdSt^^eSer''^ '''' ^^^^ ^'^ --^ --^'^' watchi^.tStn 
 
 Jk^ 
 
 proper accountancy principles, and that those 
 responsible for the accuracy of the record, while keep- 
 ing in touch with operative methods, should also 
 keep in touch with the Accounts Department proper. 
 This is an end that can readily be achieved, if the 
 Costs Department be organised as a sort of off-shoot 
 of the Accounts Department, worked upon the 
 principles of sectional balancing. It cannot be worked 
 satisfactorily upon any other principle whatsoever. 
 Too often, however, where it exists at all, the Costs 
 Department is worked upon no recognisable principle 
 of accounts, but represents merely something which 
 those responsible for works management have felt 
 compelled to build up. because the Accounts Depart- 
 ment never by any chance gives them the kind of 
 information that they want, or, indeed, any useful 
 information in time to be of practical value 
 
 The truth would seem to be that, in too many cases, 
 the Accounts Department of a manufacturing business 
 is entirely out of touch with practical requirements. 
 Not infrequently it seems to glory in its isolation. 
 In the majority of cases those connected with it 
 seem to take a pride in dissociating themselves from 
 the practical side of the business, and express a lofty 
 contempt for it and its methods. Their ideal, and 
 their sole ideal, is too often to build up annual accounts 
 for submission to shareholders in general meeting ; 
 and but too often these accounts altogether fail to 
 show the real results of the actual working of the 
 undertaking year by year, because a deliberate policy 
 has been embarked upon of " averaging " results, 
 with a view to showing as nearly as possible uniform 
 profits from year to year. I say nothing now upon 
 the subject of Secret Reserves generally, or their 
 permissibility ; but I do wish to emphasise the fact 
 that the effect of constituting such reserves is to 
 prevent the annual accounts from showing actual 
 working results, and therefore necessarily to prevent 
 cheir keeping in close touch with any proper system 
 of Cost Accounts, which must necessarily aim at 
 showing •' the truth, the whole truth, and nothing 
 but the truth," whether such truth be palatable or 
 not. 
 
 It cannot truthfully be said that the Institute of 
 Chartered Accountants in England and Wales has 
 hitherto done much to encourage a study of manufac- 
 turing costs. I have examined the sixteen published 
 
volumes of The Accountants' Manual, which deal 
 with the half-vearlv examinations of the Institute 
 from December 1884 to June 1916 inclusive — 
 a period of 32 years — and I find that, during that 
 time, only 41 questions were set which might possibly 
 be regarded as having some bearing upon Cost 
 Accounts, and that no questions whatever appeared 
 upon the subject in Volume XVI of The Accountants* 
 Manual dealing with the last two years of the above- 
 named period. In the course of these 32 years, 64 
 half-yearly Intermediate Examinations and 64 
 half-yearly Final Examinations were held, making 
 a total of 128 examinations. At each of these 
 examinations two papers, of ten questions each, have 
 been set on " Bookkeeping and Accounts" making 
 a total of 2,560 questions in all. of which only 41 
 (or less than i| per cent.) had any sort of connection 
 with Cost Accounts. A further scrutiny of there 
 41 questions shows, however, that no less than 19 
 of them are not really connected with manufacturing 
 costs at all, but rather with the cost sheet of some 
 concern continuously producing a single product, 
 and for all practical purposes these 19 questions 
 represent the same question re-set on nineteen 
 <iifferent occasions. It was set 13 times during the 
 20 years ended June 1904, six times during the ten 
 years ended June 191 4, a«d not at all during the 
 ensuing two years. The remaining 22 questions on 
 Cost Accounts for the most part are so general, or 
 so elementary, as to suggest that the examiners 
 responsible for them attached no real importance 
 to the subject. 
 
 Like all other accounts, Cost Accounts are required 
 ior the purpose of arriving at records of actual 
 facts ; to enable those responsible for management 
 to apportion praise and blame, and to enable them to 
 build up in the future a business policy founded upon 
 experience, rather than upon surmise or guesswork. 
 They are particularly valuable when margins of 
 profit are low, and when, therefore, the most rigid 
 economy must perforce be practised ; when there is 
 the most urgent need to compare the relative costs 
 of alternative methods ; and also, from time to time, 
 when the question arises as to whether it is, or is not, 
 worth while to increase the output. 
 
 Cost Accounts must give prompt results. If 
 anything requires to be altered, clearly it is important 
 
 that it should be altered at the earliest possible 
 moment, rather than that the disadvantageous 
 conditions which have been discovered by the Cost 
 Accounts should be continued unnecessarily. 
 
 In those cases where selling price is based upon 
 cost price, manifestly the selling price cannot be 
 fixed until the cost price is known. In such cases 
 any delay in arriving at the cost price involves a 
 corresponding delay in fixing the selling price, and, 
 in consequence, a loss of interest through delay in 
 payment, as well as an appreciably increased risk 
 of bad and doubtful debts, to say nothing of the 
 annoyance and inconvenience caused to the customer, 
 who in the meanwhile is kept waiting for a figure of 
 " cost " that he, in his turn, requires. 
 
 The pamphlet now under discussion attempts most 
 pluckily to lay the foundations of a uniform system 
 of costing, applicable to all classes of manufacturing 
 business. It is perhaps an open question as to how 
 far absolute uniformity is practicable. It is also a 
 matter for discussion as to how far uniformity is 
 desirable, seeing that uniformity necessarily involves 
 stereotyped methods, and a withdrawal of all further 
 incentive towards progress. Upon the whole, I 
 think that, for many reasons, uniformity of method 
 is as undesirable as it would in all probability be 
 impracticable of accomplishment. But, as regards 
 principles, there are certainly not the same objec- 
 tions to uniformity per se ; and, inasmuch as the 
 pamphlet now under discussion attempts little more 
 than the enunciation of principles, it would appear 
 here to be upon fairly safe ground. 
 
 Particularly valuable is that portion of the 
 pamphlet which emphasises the great importance of 
 a proper method of dealing with Overhead Charges. 
 As has already been stated, most existing systems 
 are very defective in this respect. Some ignore the 
 question of Overhead Charges altogether, and are 
 content to arrive merely at a basis of prime cost. 
 Others, which profess to deal with the subject and 
 to arrive at total costs, do so by adding to the prime 
 cost a " loading " which it i estimated will in the 
 course of a year (or other financial period) amount 
 approximately to the Overhead Charges actually 
 incurred during that time. That is to say, in fact, 
 they drop all attempt at accurate costing, and from 
 this stage onward substitute estimates for facts. 
 
f 
 
 8 
 
 However necessary it may be to make allowances 
 mentally for the fact that working costs will neces- 
 sarily be abnormal during abnormal periods, there 
 can, it seems to me, be no justification whatever for 
 running away from the actual facts of the case. 
 Broadly speaking, the facts are that, during periods 
 of great activity, such work as can be turned out at 
 all is naturally turned out subject to a smaller 
 " loading "in respect of Overhead Charges than would 
 be inevitable in the case of work turned out at times 
 when the factory is run on short time. 
 
 Further, Cost Accounts, to be useful, should not 
 be trimmed up and averaged down upon a yearly 
 basis. There is, so far as practical working is con- 
 cerned, nothing whatever that is magical about the 
 yearly period, however much this period may appeal 
 to shareholders, and those who think like share- 
 holders. The Overhead Charges in any business are 
 fluctuating day by day, as the activity of the work 
 fluctuates. The aim should undoubtedly be to 
 apportion the Overhead Charges actually' incurred 
 over the work done during the time when they were 
 incurred. If we admit this as a sound principle, it 
 is quite unnecessary for us to carry it to an extrava- 
 gant length. It may fairly be regarded as unneces- 
 sary, and unpractical, to attempt to apportion the 
 Overhead Charges of each separate hour over the out- 
 put of each separate hour ; but, inasmuch as for most 
 purix)ses working costf are determined upon a 
 monthly basis,* the month would seem to be the 
 normal basis upon which to deal with Overhead 
 Charges. 
 
 It is always practicable to determine very closely 
 indeed the actual Overhead Charges in respect of 
 each '• month," and these will certainly not be 
 uniform, although they will naturally fluctuate less 
 than do the items constituting prime cost. If the 
 actual Overhead Charges for the month be equitably 
 apportioned over the output for the month, that is 
 for all practical purposes dealing with them on a 
 basis of actual fact. In some cases this is actually 
 done in practice, thus demonstrating that there is 
 no inherent difl&culty about the adoption of the 
 principle ; but I think it would be safe to say that 
 
 ♦Usually, a quarter consists of two months of four weeks each, and one 
 "month" of five weeks, making thirteen weeks in all. Twice in each 
 eleven years, the working year consists of 53 weeks, in which case, one 
 quarter cdntaios 14 weeks. 
 
 w- 
 
 Overhead Charges are not thus treated, and the facts 
 thus truly faced in ten per cent, of those factories 
 which claim to be keeping proper Cost Accounts. 
 In the majority of cases, estimates seem to be 
 preferred to facts so far as Overhead Charges are 
 concerned ; and that, apparently, for the reason that 
 works managers and others, whose work the Cost 
 Accounts are intended to scrutinise, seem deliberately 
 to prefer Cost Accounts that gloss over awkward 
 facts, and show " pretty " results. We must not 
 be too hard upon them for this, for where, after all, 
 can one expect to find the accounting party who, if 
 left to himself, would devise the most perfect means 
 of enabling us to call him to account ? The works 
 manager who asks for Cost Accounts naturally wants 
 them for his own purposes. He does not institute 
 them to enable managing directors, and such like, 
 to give him something extra to worry about. 
 
 A particularly valuable part of the pamphlet now 
 under discussion is that which emphasises the need 
 for deparcmentalising Overhead Charges, to enable 
 them to be apportioned over the output upon a 
 reasonable basis. This departmentalisation should 
 be upon two principles, operating so to speak 
 transversely : — 
 
 (a) As regards each item of output, Overhead 
 Charges will require to be sub-divided into groups, 
 so that all such charges are not apportioned over the 
 output upon the same basis. 
 
 {b) Certain groups of charges connected with 
 specified departments should naturally be appor- 
 tioned over the output of those particular depart- 
 ments alone. 
 
 The works manager has perhaps a natural reluct- 
 ance to go quite so far as this. Even although he 
 admits the inherent reasonableness of the view put 
 forward, he is apt (perhaps a little naturally) to 
 hesitate, lest he should be embarking upon something 
 which — however sound in principle ; however per- 
 fect in theory — is impossible of actual attainment. 
 Here, as elsewhere, some idea of proportion is helpful. 
 In cases where Overhead Charges do not exceed 
 (say) 15 per cent, of the prime cost, it is perhaps not 
 very material what method in reason be adopted for 
 apportioning the former over the various units of 
 output: but when, as is not infrequently the case. 
 
lO 
 
 i! i 
 
 I 
 
 ill 
 
 fl 
 
 Overhead Charges may be anything up to 50 per cent, 
 of the prime cost (or even more), it is manifest that 
 greater precision is essential before any useful results 
 can be obtained. W hen, further, it is borne in mind 
 that, even if the most complex system of dealing with 
 Overhead Charges conceivable were to be adopted, 
 the number of accounting entries in connection there- 
 with need never exceed (say) 5 per cent of the account - 
 mg entries required in connection with prime cost 
 It will, it is hoped, be realised that there is really no 
 reason whatever to hesitate, on the grounds of its 
 complexity, about the adoption of any method of 
 handlmg Overhead Charges than may commend itself 
 upon its merits. 
 
 The truth of the matter is— and the fact cannot be 
 insisted upon too strongly— that no svstem of Cost 
 Accounts sufficiently detailed to be of' any practical 
 value to the general manufacturer can possibly be 
 produced quickly enough for the results to be of 
 any real use whatsoever without the aid of office 
 machinery. There is no reason for supposing that 
 the last word has yet been said upon the subject of 
 office machinery : but, even as matters stand, there 
 IS ample equipment for those who choose to utilise 
 It to enable them to prepare Cost Accounts, as near 
 perfection as possible, far more promptly than any- 
 thing that they have hitherto imagined conceivable 
 at approximately one-tenth of the cost of Cost Accounts 
 prepared upon the old-fashioned methods. To 
 attempt to go on keeping Cost Accounts by hand at 
 the present time seems as childish as it would be to 
 attempt to keep down the water in a coal-mine to-day 
 by the methods which were regarded as wonderful 
 when invented by Watt in 1 769. Yet. be it remem- 
 bered, there are c,uite a large number of intelligent 
 men, probably the majority, who are still keeping 
 their accounts upon methods which are almost the 
 exact counterpart of those in use in 1494 ! There 
 have been amazing advances in factory methods 
 during the past fifty or sixty years, but there has 
 been strikingly little alteration in the accountancy 
 methods adopted in most factories. 
 
 In connection with a practical system of Cost 
 Accounts, we may make our selection among the 
 following devices : — 
 
 (i) Typewriters to enable us. by means of carbon 
 sheets, to manifold copies of requisitions, &c.. which 
 take the place of handwritten first-entry records. 
 
 II 
 
 (2) Cards or Loose-Leaves, each limited to the 
 record of a single process, or event, and thus readily 
 lending themselves to assemblage into totals under 
 any desired number of classifying headings indi- 
 cated by numbers (i.e. job numbers, stock account 
 numbers, workmen's numbers. &c.). 
 
 (3) Clock Machines, designed to record instanta- 
 neously and accurately times of starting and finishing 
 operations. 
 
 (4) Slide Rules, or other mechanical devices, 
 designed to enable us to calculate with certainty and 
 speed the time occupied in performing specified 
 operations. 
 
 (5) Comptometers, and other similar calculating 
 machines, designed to enable us to arrive rapidly and 
 accurately at the money value of work done, or stores 
 issued as the cases may be, in respect of specified 
 operations. 
 
 (6) Filing Trays or Cabinets, in which may be 
 stored, under appropriate headings, isolated records 
 of individual operations until the results in connec- 
 tion therewith can conveniently be summarised 
 hereafter. 
 
 (7) The Addressograph, to reproduce any kind of 
 stereotyped record upon clock cards, pay rolls, pay 
 envelopes, &c. 
 
 (8) The Burroughs Adding Machine, for listing 
 operations, particularly in connection with the 
 construction of pay sheets, and the reconciliation of 
 the total thereof with the value of work done, as 
 charged up against individual Cost Accounts. 
 
 (9) The Hollerith Machines, which are particularly 
 valuable as a means of mechanically sorting punched 
 cards representing individual operations upon any 
 desired basis any desired number of times from any 
 desired number of different standpoints, and after- 
 wards assembling the results in tabulated form. 
 
 It will very possibly be said that, in giving the 
 above list. I have not approached a complete recital 
 of all the ingenious mechanical devices now at the 
 service of the intelligent cost accountant. This is 
 undoubtedly true. My object has not been to aim at 
 completeness, but rather to mention machines which 
 I know to be suited to the particular work that I 
 
12 
 
 have allotted to them respectively. I have no hesita- 
 tion in stating that, with an ofl&ce properly equipped 
 with these machines, a capable cost accountant 
 provided with a junior staff costing (say) £5 a week, 
 would be able to get through more work more 
 accurately — and infinitely more promptly — than 
 would be possible under old-fashioned methods with 
 a staff costing ten times that sum. 
 
 But, when all has been said, it must, of course, be 
 borne in mind that Cost Accounts are only a means 
 to an end, and not an end in themselves. Cost 
 Accounts are not a cure for managerial inefficiency. 
 All that they can reasonably be expected to do is 
 to show where there is evidence of inefficiency, and 
 -where there are leakages. It remains for the capable 
 heads, having their attention directed to the weak 
 spots, to take steps to secure their removal. I do 
 not imagine that anyone will ever invent an office 
 machine that will enable a business to do without a 
 really competent general manager. 
 
 APPENDIX. 
 
 I 
 
 A Report issued by the Federal Trade Commission of 
 Washington, U.S.A., reproduced by kind permission of 
 the Chairman. 
 
 It is a fact too little realised that an accurate determina- 
 tion of costs is fundamentally related to manufacturing 
 efficiency. More and more concerns are joining the ranks 
 of those who realise the necessity of knowing accurately 
 their costs of manufacturing and selling. Every business 
 man who joins in this work can feel that he is doing his 
 part toward the improvement of business conditions gener- 
 ally, and his own business conditions in particular. This 
 bulletin, published by the Federal Trade Commission 
 of Washington, U.S. A., has been prepared with a view to 
 aiding the campaign of education by explaining what a 
 cost system is, how it operates, the results obtained, and 
 the benefits to be derived from its operation. 
 
 Objections to Installing Cost Systems. 
 
 There are a number of objections in the minds of business 
 men who have not installed costs systems to taking the 
 matter up. One of these is the feeling that exists in the 
 minds of so many that their business is unique and 
 different from any other, and that no system could be 
 devised which would give them true costs. It is unques- 
 tionably true that some lines of manufacture lend them- 
 selves more readily to the installation of a cost system 
 than others, but it is also true that no line of manufacture 
 is so complicated that a system cannot be devised which 
 will give reasonably accurate results. 
 
 The most common objection is that of the cost of 
 installation and the expense of operation. Many manu- 
 facturers are of the opinion that a cost system means an 
 interminable amount of detail and red tape, and the 
 assistance of a number of extra clerks. It is true, in many 
 cases, that some extra labour may be required, but not 
 to the extent that the manufacturer fears. There is 
 in nearly every office that is not systematised sufficient 
 unnecessary work done to cut the extra work down to a 
 minimum, and, in fact, in some cases where an office has 
 been systematised, it has not been necessary to employ 
 any extra help at all. If the manufacturer will look upon 
 a cost system as an investment which he expects to produce 
 for him a fair return in the same manner that an invest- 
 ment in improved machinery would, the objection as to 
 the expense is not a valid one. A number of business 
 men think that money spent for stationery is wasted, 
 and that a cheap ready-made book will answer as well as 
 
14 
 
 one specially designed for his business. If a lo dollar 
 book which lasts a year vdU save half an hour a day for a 
 12 dollar-a-week clerk as compared with the use of a 
 ready-made book which can be bought for i dollar, the 
 additional investment of 9 dollars has brought in a revenue 
 or effected a saving of 39 dollars for the year. This holds 
 true of nearly all specially designed forms' as well. 
 
 Other business men are of the opinion that they do 
 not need a cost system because they know what their goods 
 cost. They may. and a number of them do have an 
 approximate idea of what their goods cost, but in a large 
 number of instances this supposed knowledge is based on 
 foremen's guesses in advance as to the time necessary to da 
 the work or as to the time spent on the work after it is 
 done. Guesswork is unsafe and poor business practice. 
 
 Necessity for Ascertaining True Cots. 
 Formerly the necessity for the determination of true 
 manufacturing costs was not as imperative as it is to-day 
 Margms between cost and selling price in most lines were 
 larger. Costs could be ignored except in a general way 
 and a good return still be made on the investment ; but 
 to-day margins of profit in most lines of trade are' very 
 much narrower than formerly, and the necessity for the 
 most efficient management and closest analysis is 
 felt as never before. 
 
 It is necessary to-day for the business man's success 
 that he know on what articles he is making a profit and 
 on what he is incurring a loss. Competitive conditions 
 are senouslydisturbed where losses on one or more articles 
 are recovered by profits on other articles. It is obvious 
 that a manufacturer should not only know the cost of 
 each article he manufactures but that he should see that 
 ever>' article manufactured bears its proper share of 
 factory and general overhead. 
 
 Most manufacturing plants have grown to a size which 
 renders personal supervision impossible. The only 
 reliable way. therefore, by which an executive can judge 
 of the efficiency of an organisation is through a system of 
 periodical statistical reports. These reports can only be 
 accurately obtained when a good cost system is in 
 operation. 
 
 New methods are being introduced and improved 
 machinery installed in the factory every day, with a view 
 of reducing costs either by the elimination of waste or by 
 increasing efficiency. It is impossible to know whether 
 the introduction of these improvements will reduce costs 
 unless the manufacturer knows not only what his total 
 cost is but exactly what items make up the total. Items 
 of cost are frequently lost track of when the total only is 
 considered, while if these items were properly segregated 
 so as to show what they were they could be materially 
 reduced and, in some in.stances, eliminated altogether. 
 
 15 
 
 Exchange of Statistical Information Beneficial. 
 
 In the past many manufacturers disliked to give out 
 information concerning their business. To-day the reverse 
 is the case. Trade associations are compiling statistics 
 as to production, shipments, and costs for the benefit of 
 their members, and the manufacturer, instead of trying 
 to keep this information to himself, welcomes the oppor- 
 tunity to supply the data, knowing that his competitors 
 are doing the same thing and that these statistics will be 
 of benefit to himself and to his industry. The Federal 
 Trade Commission is keenly alive to the value of this 
 information. 
 
 The Commission is urging manufacturers to determine 
 their costs accurately in the interest of better trade 
 conditions. It believes that anything that is of benefit 
 to an industry is of benefit to the public, and it is also of 
 the opinion that the nearer cost systems approach uni- 
 formity the more valuable will be the results. 
 
 Many Businesses not Profitable. 
 
 A large proportion of manufacturers are not making 
 the money they should. A great number of them are 
 actually losing money. 
 
 The purpose of conducting a business is to make 
 money, and the only way to make money is to sell some- 
 thing for more than it costs. The first essential, then, is 
 to know the cost. It is the belief of the Commission that 
 the small margin of profit existing in so many of our 
 industries is due to the ignorance on the part of manu- 
 facturers of what their goods actually cost to produce. 
 This ignorance causes them to make unprofitable prices, 
 which the manufacturer who does know his cost is forced 
 to meet to a large extent. 
 
 % 
 What is Cost ? 
 
 Cost is defined as the amount or equivalent paid, or 
 charged, or given for anything ; loss of any kind, expendi- 
 ture, outlay, as of money, time, labour. 
 
 This equivalent may be in the form of money paid for 
 material or for labour, or for some one of the many kinds 
 of expense or loss that exist in every manufacturing 
 business. It is apparent that cost consists of three 
 elements, viz. material, labour, and expense. 
 
 System and its Development. 
 
 The problem is to ascertain the amount of each of these 
 elements, and in order to accomplish this in the simplest 
 and most practical manner the manufacturer has recourse 
 to system. System is defined as a regular method or 
 order, a formal arrangement, ' or a mode of operation 
 governed by general laws or rules. 
 
 A 
 
I6 
 
 17 
 
 'i 
 
 During the last ten years the best accounting brains in 
 the country have been devoting a great deal of time to 
 the perfection of general laws or rules which will give 
 the desired results with the least effort and expense, and 
 the outcome of their work is what is known as a " Cost 
 System." This provides not only for the determination 
 of the amount of each element of cost properly chargeable 
 to each job or operation, but also provides for an improved 
 method of bookkeeping which causes the books to reflect 
 at all times the true financial and industrial condition of 
 the business and renders possible the preparation of 
 monthly statements of conditions, as well as complete 
 monthly statements of financial and factor>' operations. 
 
 There are, generally speaking, but two distinct methods 
 of manufacture. Each requires a cost system a little 
 different in detail but identical in fundamental principles. 
 The first of these is used in a business where every- order 
 is a separate article of manufacture, very often made to 
 order, and the selling price fixed before work is started ; 
 and the second is used in a business where the output 
 consists of one or more articles which are being continually 
 produced. For convenience we will designate the cost 
 systems applicable to each as the " Job Cost System " 
 and the " Continuous Production System." 
 
 The Job Cost System. 
 
 The first step is to provide for giving the factory 
 instructions as to what work is to be done, and a form 
 should be provided which must give the following informa- 
 tion : Job number, date, name and address of customer 
 for whom work is to be done, a description of the work to 
 be done, giving sufficient details, specifications as to what 
 material will be needed, and shipping instructions. This 
 form should also have space for the entry of shipments, 
 so that when the work is done the order form will be a 
 complete record. A duplicate of this factory- order should 
 be kept in the office, and when the original is sent to the 
 factory the cost clerk opens a job cost sheet under that 
 number. 
 
 The job cost sheet should show number, date opened, 
 custodier's name, and, in some cases, a brief description of 
 the A\ork is advisable, as it sometimes enables the cost 
 clerk to detect an error in the number shown on the time 
 ticket or material requisition. As all reports are made by 
 job number instead of by name, it is of vital importance 
 that the greatest care be taken to insure the coirectness 
 of the numbers on the time tickets and material requisi- 
 tions. In addition to the above information, the cost 
 sheet should be arranged so as to provide columns for the 
 following : Date, employee's number, hours, amount 
 of pay, machine number, machine hours, requisition 
 number, quantity of material, and cost thereof. 
 
 Material. — ^The first element of cost is material. Material 
 is of two kinds, direct and indirect. 
 
 Direct material is that which forms part of some 
 particular job and can be so charged. Indirect material 
 is that which cannot be located as belonging to a par- 
 ticular job, and which is more in the nature of general 
 supplies. This class of material is sometimes termed 
 " expense material," as its ultimate destination is the 
 Expense Account of some department. 
 
 Material must be purchased, received, checked, and 
 taken care of until it is required for use, and the general 
 method recommended is as follows : — 
 
 A part of the factory should be set aside as a stock" 
 room and some employee designated to perform the duties 
 of stock clerk. The stock clerk will keep the stock ledger 
 cards or sheets, one for each article, showing the quantity 
 on hand. These cards should also show the maximum 
 quantity of each article he is to be allowed to carry and 
 also the minimum below which the stock must not be 
 allowed to fall. When the stock reaches the minimum a 
 requisition should be made on the purchasing agent for 
 sufficient quantity to bring the stock up to the maximum 
 and sent to the superintendent or works manager for 
 approval, after which the goods are ordered. When the 
 goods eome in they should go to the receiving clerk, who 
 checks them, reports their receipt to the office, and 
 delivers the goods to the stock room, where they remain 
 until requisitioned out. 
 
 When the order reaches the factory the first step is to 
 obtain the material, and a requisition should be made 
 on the storeroom for the necessary quantity. This 
 requisition should be numbered and space should be 
 provided thereon for job number or department, date, 
 quantity, description, price, amount, and signature of 
 foreman. The cost clerk extends the amount on the 
 requisition and posts it to the job cost sheet in the 
 space provided, then files it away until the end of the 
 month, when the total for the month must be obtained. 
 
 Labour. — The second element of cost is labour, and this, 
 like material, is divided into two classes — direct, or, as it 
 is sometimes called, productive labour, and indirect, or 
 non-productive labour. Direct labour is that which is 
 applied directly to the job and which can be so charged. 
 Indirect labour is that which cannot be located as belong- 
 ing to any particular job, but must be charged to the 
 expenses of some department. 
 
 The general method of handling labour is to have each 
 employee make up a time ticket each day. This ticket, 
 for recording direct labour, should show the employee's 
 name, employee's number, date and hours worked on 
 each job, job number, and machine number, if a machine 
 
I 
 
 1 
 
 ■I 
 
 i8 
 
 is used ; and in the case of indirect labour the depart- 
 ment and nature of the work must be shown in lieu of 
 job number. These time tickets are sent in to the ofl&ce 
 each day and the direct labour is posted to the job cost 
 sheets and the indirect labour entered on a summary sheet 
 with columns headed by the name of departments, so that 
 the totals can be posted to the Department Expense 
 Account at the end of the month. 
 
 The productive hours for each department are entered 
 on another summary, both for man hours and machine 
 hours, which is totalled at the end of the month. If the 
 work is correctly done, the totals on this summary will 
 equal the total of the postings made to the job cost sheets. 
 
 Overhead Expense. — The job cost sheet now has entered 
 thereon the first two elements of cost., viz. direct material 
 and direct labour, and the next question is the proper 
 method of handling the third element of cost, which is 
 generally known as " Overhead Expense," or, as it is 
 also called, " Burden." Overhead expense is the expense 
 of every kind connected with the business, none of which 
 can be directly located as belonging to a particular job. 
 These expenses, while part of the cost of a job, are general, 
 so cannot reach the job direct ; hence a method must be 
 devised for them to reach the cost sheet in an indirect 
 manner, the method at the same time being so planned 
 that each job will receive its fair proportion of the total. 
 
 Before taking up the question of how overhead expense 
 is to be handled, it is necessary to determine just what 
 items constitute overhead. A list of these items and 
 their description must necessarily be very general and 
 subject to change, as items of expense occur in some lines 
 of manufacture which it is necessary to treat as overhead 
 while the same items in another line can be handled as 
 direct expense. 
 
 Overhead may properly be divided into two classes — 
 factory overhead, which consists of items directly belong- 
 ing to factory operations, and general overhead, which is 
 expense not directly connected with the factory. 
 
 As factory overhead is one of the items of total factory 
 cost, the method of handling this will be outlined first. 
 
 Departmentalisation Necessary for Proper Distribution of 
 
 Factory Overhead. 
 
 The first step in a fair and equable distribution of 
 factory overhead is a departmentahsation of the business. 
 Every business can be departmentalised to some extent, 
 some more than others, but the subdivision into depart- 
 ments varies so much in the different lines that it is almost 
 impossible to give any definite idea as to what division 
 should be made. Generally speaking, it is best to sub- 
 divide into departments according to operations of manu- 
 facture, although at times, for simplicity, a subdivision 
 
 lb 
 
 19 
 
 i 
 I 
 
 which places similar work in the same department regard- 
 less of operation is used and has proved satisfactory in 
 a number of cases. By similar work is meant hand 
 wdl-kers who use practically the same amount of supplies, 
 machines of similar type, &c. Departmentalising by 
 operations is a little more complicated, as it results in a 
 greater number of departments, because the same or a 
 similar kind of hand work may be done in several depart- 
 ments, and the same holds true of the machine depart- 
 ments. 
 
 In a number of lines of manufacture all work can be 
 placed in one department where the unit of production is 
 the same, i.e. with hand workers the unit is the produc- 
 tive man hour, with machine workers the machine hour, 
 and in other departments the unit may be pound, ton, 
 piece, dozen, square feet, yard, &c. In departmentalising 
 a business the fact should be borne in mind that the better 
 the departmental subdivision is made the more accurate 
 will be the cost results. 
 
 Fixed Factory Charges. 
 
 Building expense, power, insurance, taxes, and deprecia- 
 tion constitute what are generally known as " Fixed 
 Factory Charges," because they are practically fixed, 
 and the factory has nothing to do with either increasing 
 or decreasing them. 
 
 Building Expense. 
 
 The first requisite of a business is a place in which to 
 work ; consequently the first item of overhead is Building 
 Expense or Rent. If the building is owned by the manu- 
 facturer, the building expenses consist of insurance, taxes, 
 depreciation, and repairs, together with such other 
 expenses which are general in their nature, but yet are 
 necessary to render the building useful, such as heat, light, 
 elevator, janitor, and water. If the building is rented the 
 items of insurance, taxes, depreciation, and repairs are 
 paid by the owner, and in lieu of these is rent. Rent 
 includes a return on the investment in addition to the 
 items named, so when it is desired to make comparisons 
 between plants where the building is owned and where 
 it is rented, the return on the investment must be taken 
 into consideration. 
 
 The basis of distribution for all rent charges is the 
 productive or used square feet. The total used square 
 feet divided into the total rent charges gives the charge 
 per used square foot. This result multiplied by the used 
 area of the department gives that department's proportion 
 of the total rent expenses. By used floor space is meant 
 that which is actually in use, exclusive of stairways, 
 passages, elevator space, and idle or unused space. 
 
i B|< 
 
 It 
 
 If 
 
 20 
 
 Power. 
 
 The second requisite is power, and this must be obtained 
 either from outside sources or generated in one's own 
 plant The distribution of power is a little more difficult 
 tnan that of building expense, and sometimes an arbitrary 
 Oivision based on the opinion of the engineer and superin- 
 tendent is used, but this method is not recommended. 
 Une difficulty in distributing power charges is that verv- 
 often the same boiler supplies steam for heating and steam 
 for power generating, and it is difficult to say how much 
 for each. ■' 
 
 For distributing power charges the factor generally used 
 IS found by multiplying the horse-power required by each 
 machine or department by the average hours run by 
 each and dividing the sum into the total power charge 
 l^ower distribution is a problem in itself, and it varies so- 
 much in different plants that it is impossible to lay down 
 any rules for its solution. Each plant must be treated in 
 an individual manner according to the existing conditions. 
 
 Insurance and Taxes. 
 
 Insurance and taxes should be distributed on the basis 
 of the actual net value of the equipment in each depart- 
 ment. This refers to fire insurance and taxes on the plant 
 only, as boiler insurance is a charge to power, accident 
 insurance is a charge to general factory expense, and the 
 charge for other forms of insurance is determined by the 
 nature of the msurance. Taxes on real estate and plant 
 only are chargeable against manufacturing operations as 
 taxes on finished goods in stock and franchise taxes are 
 chargeable to general expense, while income-tax is a 
 direct charge to profit and loss. 
 
 Depreciation— The Necessity of including in Cost. 
 
 Depreciation is one of the most important of all the 
 overhead expenses, because it is generally the largest, 
 ihere has probably been more written on this subject 
 than any other item of overhead, but there are so many 
 different ways of handling depreciation, some of which 
 are best adapted for one line and some for another that 
 there is really no recognised standard method, 'it is 
 universally admitted, however, that depreciation does 
 exist, that it is an element of cost just as much as labour 
 or material, and that any system which does not provide 
 for includmg it is faulty and one that will not give true 
 costs. ° 
 
 Methods of Determining Depreciation. 
 
 One method of handling depreciation, which is unquaU- 
 fiedly condemned although extensively used, is to wait 
 until the end of the year, and then if the profit and loss 
 statement shows that a good profit has been earned to 
 
 'V, 
 
 21 
 
 A Ji 
 
 charge a part of this profit to depreciation. If, on the 
 other hand, the profit and loss statement shows little or 
 no profit, nothing is charged to depreciation. It is 
 difficult to understand how any practical man can take 
 the view that his plant and equipment have not worn out 
 because he has not made a profit and at the same time have 
 worn out when he has made a profit. 
 
 The first step necessary to provide for proper deprecia- 
 tion is to departmentalise the plant values. The next 
 step is to take each kind of equipment or machine and 
 figure its proper depreciation. 
 
 There are several methods of determining the amount 
 of depreciation. One is to estimate the scrap value and 
 deduct this figure from the original cost. The difference 
 is then divided by the estimated life of the machine in 
 years, and the result is the annual depreciation on that 
 machine. A modification of this method which is not 
 quite as simple, but really affords no difficulty, is after 
 ascertaining the amount to be charged off during the life 
 of the machine to determine a percentage which, when 
 applied to the net book value of the machine, will leave 
 only the scrap value of the machine on the books at the 
 expiration of its estimated life. 
 
 To illustrate : If the initial cost of a machine and 
 equipment is i.ooo dollars and the estimated scrap value 
 is 200 dollars, with an estimated life of 10 years, then 
 800 dollars is the amount that must be charged into cost 
 during that period, or 80 dollars per year. To attain this 
 result, by using the net value of the machine as a basis, a 
 rate of 15 per cent, would be necessary, which would 
 make the depreciation 15 per cent, on 1,000 dollars, or 
 150 dollars, the first year ; 15 per cent, on 850 dollars, or 
 127.50 dollars, the second year, &c. The advantage of 
 this method in the interest of normal costs is that the 
 decrease in depreciation charges is ordinarily offset by an 
 increase in lepairs. 
 
 Variable Factory Charges. 
 
 Variable charges or controllable expenses are the final 
 items of factory overhead. These are subdivided depart- 
 mentally and charged to the Expense Account of each 
 department. Owing to the fact that no two lines of 
 manufacture have the same kinds of expenses, a descrip- 
 tion of them must be very general. Such items as non- 
 productive labour, repairs, lubricating oils, and miscel- 
 laneous supplies are found in nearly all Expense Accounts. 
 
 Factory expenses are incurred which cannot be located 
 as belonging to any department, and these items should 
 be charged to an account called " General Factory 
 Expense," This account should be distributed overtho 
 Departmental Expense Accounts on some basis which is 
 fair to all, the nature of this distribution varying as to 
 
• <■ 
 
 I 
 
 22 
 
 special conditions existing in each particular business. 
 Great care should be taken to prevent anything being 
 charged to the General Account that could possibly be 
 charged to one of the Departmental Accounts, as other- 
 wise, either through carelessness or lack of knowledge, 
 the General Account uill become the dumping ground for 
 all items the charge for which is in the least doubt. 
 
 Interest. 
 
 The question of whether interest on the capital invested 
 IS a proper charge against cost of production is one on 
 which there is a marked difference of opinion. The cases 
 where it is considered desirable to include interest in cost 
 may be grouped under two heads : — 
 
 1. Where materials have to be stored for long periods 
 while a seasoning process is being completed. 
 
 2. Where it is desired to show the effect of variations 
 in the amount of capital employed and the term of 
 employment. 
 
 As seasoned material has a higher value than when 
 first purchased, it is apparent that the interest on the 
 capital locked up during the seasoning forms in a sense a 
 direct part of the cost of the material. If the material 
 were purchased in a seasoned condition, a higher price 
 would have to be paid, and this price would at least 
 include interest and other carrying charges. 
 
 As some manufacturing processes require the use of 
 expensive equipment, or take a long time to complete, 
 both of which tie up capital, while other processes require 
 neither the equipment nor the time, it is impossible to 
 get true relative costs unless consideration is given to 
 interest on the capital employed. 
 
 Cost accountants and industrial engineers, f«r com- 
 parative and statistical purposes, almost unanimously 
 advocate including interest in cost, and so far as interest 
 is included in cost for comparative or statistical purposes 
 it serves a useful purpose. 
 
 Auditors, on the other hand, who are more directly 
 interested in the preparation of statements showing the 
 financial condition of a business, take the ground that 
 interest is not an item of cost, and that to include it in 
 cost results in an inflation of inventor}^ values and an 
 anticipation of profits. It is true that including interest 
 in cost does inflate the inventory, and is an anticipation 
 of profit by exactly the amount of interest charged to the 
 cost of the goods on hand. In arriving at inventory 
 values, however, the approximate interest which has 
 been charged to the cost of the goods on hand can be 
 readily eliminated. 
 
 23 
 
 It is recommended that where interest on the investment 
 is treated as an item of cost that the interest charged to 
 the goods on hand be eliminated from inventory values, 
 and that in preparing profit and loss statements the amount 
 of the interest charged to costs during the period be 
 returned to income under the specific caption " Interest 
 on Investment." 
 
 Ascertainnieni of Normal Cost. 
 
 In every manufacturing business it is unquestionably 
 true that in some months items of expense will occur which 
 are not properly chargeable against the cost for that 
 month. For instance, it may be found necessary to make 
 extensive repairs on a machine, which repairs are sufficient 
 for the entire year, and it would be manifestly unfair to 
 include the entire repairs in the costs of any given month. 
 Furthermore, every business has its dull season when its 
 departments are not running more than half time, and 
 this would also result in the actual cost for those months 
 being abnormally high. 
 
 These facts lead to the conclusion that what is necessary 
 for the manufacturer to know is not " What did it cost 
 me to produce my goods last month ? " but " What 
 " would it have cost me to produce under normal condi- 
 " tions, and how far were my actual costs from normal ? " 
 It will be seen that if selling prices are based on actual 
 costs during a busy season when the plant is probably 
 working overtime, the selling prices would be so low that 
 the plant might be literally swamped with work, while 
 conversely, if the selling prices were based on actual costs 
 when the plant was dull, they might be so high that no 
 business whatever could be obtained. It is necessary,, 
 therefore, that costs be averaged over a period of time 
 sufficiently long to take in both dull and busy seasons. 
 The method of doing this is to establish a " Reserve for 
 Overhead," and credit this account with the reduction in 
 cost during the busy season and charge it with the increase 
 in cost during the dull season. The balance of this 
 account is closed out to Trading Account, as will be 
 explained later. 
 
 Distribution of Overhead to Job Cost. 
 
 Having now provided for the recording of the overhead 
 expense, it becomes necessary to provide for charging it 
 to the different jobs. There are several methods of doing 
 this. The first is by charging a percentage on direct 
 'labour, but this in many lines results in inaccuracies, and 
 the method has been discarded by a large number of 
 manufacturers, although there are many who still use 
 it owing to its ease of operation. An illustration will show 
 the reason for the inaccuracy of this method. One man 
 receiving 40 cents an hour may be doing handwork, 
 requiring no power, very little floor space, and few supplies. 
 
24 
 
 4 
 
 If the overhead rate was 40 per cent., his hour cost would 
 be 40 plus 16, or 56 cents. Another man, receiving the 
 same rate of pay, may be working at a large and expensive 
 machine, being subject to repairs, using power, several 
 times the floor space, and using a quantity of supplies, 
 and his cost would be figured at 56 cents also, although it 
 is probably a fact that the machine he is using cannot be 
 operated for less than i dollar an hour. Another fault 
 with this method is that it throws most of the burden on 
 the high-priced man, when, as a matter of fact, and this 
 will be admitted by nearly every practical executive, the 
 high-priced man requires less supervision and wastes less 
 material than the cheaper one, and really should carry a 
 less burden instead of a greater. 
 
 There are, however, some lines of manufacture where 
 the direct labour method of distributing overhead can be 
 used to advantage, particularly where the workmen are 
 on a piece-work basis or where they receive practically 
 the same wage. In such cases a percentage of direct 
 labour will give good results. 
 
 The Productive-Hour Method, 
 
 Another method, and the one that is recognised by a 
 majority of manufacturers and accountants as the standard, 
 is what is known as the " Productive-Hour Method." 
 In a plant where practically all the labour is hand labour 
 the man hour is the basis and the total hours divided 
 into the total overhead expense gives a rate per hour, 
 which rate, multiplied by the hours spent on a job, gives 
 the overhead expense chargeable to that job. 
 
 In a plant where machines are the producing unit thi' 
 distribution must be on the basis of the machine hour, 
 and the same method is pursued as in the case of the 
 man hour. 
 
 An estimate of overhead expenses should be made at 
 the beginning of the year based on previous years' experi- 
 ence with such changes as the executive's knowledge of 
 business conditions leads him to make. This figure, 
 divided by the expected output in hours of the machines, 
 gives a normal overhead expense rate to be applied to all 
 work in that department. This rate remains constant 
 until the end of the fiscal year. The following schedule 
 shows the method to be used in estabhshing this rate : — 
 
 i 
 
 k^ 
 
 25 
 
 Estimated Factory Overhead, 1916. 
 
 
 Total 
 
 Dept. A 
 
 Dept. B 
 
 Dept. C 
 
 Indirect Labour 
 
 $7,300.00 
 
 52,500.00 
 
 S 3,000.00 
 
 $1,800,00 
 
 Building Expense . . 
 
 3,900.00 
 
 1,200.00 
 
 1,500.00 
 
 1,200.00 
 
 Power 
 
 8,'>6o.oo 
 
 2,800.00 
 
 ^ 960.00 
 
 T,8oo.oo 
 
 Insurance 
 
 420.00 
 
 144,00 
 
 102.00 
 
 84.00 
 
 Taxes 
 
 525.00 
 
 180.00 
 
 240.00 
 
 105.00 
 
 Depreciation . . 
 
 2,625.00 
 
 900.00 
 
 1.200.00 
 
 53500 
 
 Repairs 
 
 5,400.00 
 
 1,500.00 
 
 2,700.00 
 
 1,200.00 
 
 General Factory Ex- 
 
 
 
 
 
 pense 
 
 4,950.00 
 
 1,650.00 
 
 2,100.00 
 
 1,200.00 
 
 Miscellaneous Sup- 
 
 
 
 
 
 plies 
 
 790.00 
 
 240.00 
 
 360.00 
 
 190.00 
 
 Miscellaneous Expense 
 
 1,818.00 
 
 720.00 
 
 900.00 
 
 198.00 
 
 • 
 
 36,288.00 
 
 11,834.00 
 
 16,152.00 
 
 8.302.00 
 
 Yearly Hours Per Unit : 
 506 Days 8 Hours Each 
 Less 10 per cent, . . 
 
 Net Yearly Hours Per 
 
 Unit 
 
 Number of Units in Depart- 
 ment 
 Yearly Hours per Department 
 Hourly Overhead Rate 
 
 2.448 
 245 
 
 2.203 
 
 25 
 
 55.075 
 15c. 
 
 Total Factory Cost. 
 
 The job cost sheet has now been charged with the three 
 elements of cost, viz. material, labour, and factory over- 
 head expense, and the total of these constitutes factory 
 cost, to which must be added the general overhead. 
 
 Shipping, Selling, and General Expenses. 
 
 All of the items of factory cost now having been described 
 and the goods completed and placed in the storeroom as 
 finished goods, the next step is the method of handling the 
 shipping, selling, and general expenses of the business. 
 
 Shipping Account is charged each month with its 
 proportion of the fixed charges and with labour supplies 
 and miscellaneous expense items. The total of this 
 account is closed out to Profit and Loss. 
 
 Selling Expense is the next item to be considered. Some 
 include everything under this head that is not charged 
 to the factory. A better plan, though, is to separate the 
 actual selling expense from the general expenses and 
 include in selling only such items as salaries and expenses 
 of the sales force whether on the road or in the office, 
 advertising, catalogues, price lists, the cost of handling 
 cancelled orders, &c. 
 
 Under General Expenses are included officers' salaries, 
 office expenses (not including factory clerks), discount on 
 sales, bad debts, bad work, franchise taxes, and other 
 
i 
 
 26 
 
 items of a general nature. The item Bad Woik included 
 in General Expense is defective work. As every manu- 
 facturer has to contend with this item of expense it must 
 be included with the other general expenses. 
 
 An estimate of shipping, selling, and general expenses 
 should be made at the beginning of the year. This 
 amount divided by the estimated cost of the total com- 
 pleted work for the year gives a percentage for these items. 
 Applying this rate to the factory cost of a job, the amount 
 which must be added to factory cost to ascertain total 
 cost is readily determined. 
 
 The following schedule shows the method of arriving 
 at this rate : — 
 
 Estimated Shipping, Selling, and General Expenses. 
 
 For Year 1916. 
 
 
 
 
 Distribution 
 
 
 
 Total 
 
 
 
 
 
 Shipping 
 
 Selling 
 
 General 
 
 Building Expense 
 
 $1,200.00 
 
 $600.00 
 
 
 $600.00 
 
 Labour 
 
 1,500.00 
 
 1,500.00 
 
 
 
 Salaries 
 
 13,200.00 
 
 
 $9,600.00 
 
 3,60000 
 
 Officers' Salaries 
 
 4,800.00 
 
 
 
 4,800.00 
 
 Commissions 
 
 2,500.00 
 
 
 2.500.00 
 
 
 Advertisine; . . 
 
 1,500.00 
 
 
 1,500.00 
 
 
 lasurance 
 
 IQ2.00 
 
 12.00 
 
 
 180.00 
 
 Taxes 
 
 215.00 
 
 15.00 
 
 
 200.00 
 
 Depreciation 
 
 200.00 
 
 100.00 
 
 
 100.00 
 
 Repairs 
 
 120.00 
 
 50.00 
 
 
 70.00 
 
 Delivery Expense 
 
 2,300.00 
 
 
 
 2,300.00 
 
 Discount on Sales . . 
 
 1,200.00 
 
 
 
 1,200.00 
 
 Reserve for Bad Debts 
 
 750.00 
 
 
 
 750-00 
 
 Miscellaneous Expense 
 
 325-00 
 
 75.00 
 
 100.00 
 
 150.00 
 
 
 30,002.00 
 
 2,352.00 
 
 13,700.00 
 
 13,950.00 
 
 Estimated Cost of 
 
 
 
 
 
 completed work, 
 
 
 
 
 
 $120,000.00 
 
 
 
 
 
 Percentage on Cost . . 
 
 25% 
 
 2% 
 
 11.5% 
 
 11.5% 
 
 Controlling A ccou)i is. 
 
 The principles of double-entry are carried out in con- 
 nection with a cost system by means of what is known as 
 " Controlling Accounts." The advantage of the con- 
 trolling principle is that it puts the bookkeeper in position 
 to check up the work of the cost department in totals, or, 
 in other words, to control it. The control system will 
 not detect an error such as posting to the wrong account, 
 but it is an indubitable proof that the cost clerk has 
 posted ever>^ item to the proper side of some account. 
 It is hard to exaggerate the importance of this feature in 
 any cost system. 
 
 27 
 
 <' 1:7 
 
 Materials Account is charged with all purchases of 
 materials from the accounts payable or voucher register. 
 The requisitions for the month are totalled and a journal 
 entry efEected crediting materials and charging work in 
 process. The balance of the account is the cost of the 
 materials in the stockroom. 
 
 Labour Account is charged with the total labour, both 
 direct and indirect. At the end of the month the account 
 is credited with the total labour shown on the cost clerk's 
 labour summaries and work in process charged with the 
 direct labour and the Departmental Expense Accounts 
 with the indirect labour. There will be a credit balance 
 n this account which will represent the amount earned 
 by the employees, but not paid. When the end of a pay 
 period falls on the last day of the month, the account 
 should balance. 
 
 The next type of controlling accounts necessary are 
 those which reflect the overhead expenses. Building 
 Expense Account is charged with all expenses of every 
 kind as heretofore described, and at the end of the month 
 a journal entry is made charging each department with its 
 proportion of the total and crediting Building Expense 
 Account. The entire expense of this account should be 
 absorbed by the Departmental Expense Accounts. 
 
 Power Account is handled in exactly the same manner. 
 The entire expense of this account should also be absorbed 
 by the Departmental Expense Accounts. 
 
 Insurance is charged with all insurance which applies 
 to the factory, such as fire, accident, boiler, &c. This 
 account is credited each month with one-twelfth of the 
 annual payment and the proper Departmental Account 
 charged. Insurance on stock, either raw material, work 
 in process, or finished goods, is charged to General Expense 
 and Insurance Account credited. The balance of this 
 account is the value of prepaid insurance. 
 
 Taxes Account is handled in the same manner as the 
 Insurance Account, but these two accounts should be 
 kept separate. 
 
 Depreciation Account is comparatively simple to 
 handle. A journal entry is made each month charging 
 Building Expense, Power, and the Departmental Expense 
 Accounts with the amount of depreciation decided on at 
 the beginning of the year. The credit goes to an account 
 called " Depreciation Reserve," the effect of which is to 
 reduce the book value of the plant and equipment, 
 although it is not a good plan to actually reduce this value 
 on the books. It is better to carry the Reserve Account 
 and let the Plant Account remain at the original cost 
 figure. 
 
 The Departmental Expense Accounts have now been 
 charged with their proportion of the fixed charges and 
 
I 4 
 
 
 
 i 
 
 28 
 
 With the indirect labour. The only other charges are 
 miscellaneous expenses, supplies, and repairs, and these 
 come from the Accounts Payable Register. These Depart- 
 mental Expense Accounts are now credited with the 
 distributed overhead expense determined by multiplying 
 the number of operating hours by the normal hourly 
 rate Work m Process Account being charged This 
 total credit should balance the Expense Accounts but 
 practically there wiU be small balances which should be 
 charged or credited at the end of the year to Resene for 
 Overhead. 
 
 Work in Process Account now stands charged with 
 direct matenal. direct labour, and the departmental 
 overhead expense. It is credited with the cost of all 
 jobs completed during the month, the charge being to 
 Finished Goods Account. The balance of Work in 
 Process Account is the factory cost of incomplete work 
 The charge to offset this credit is to Finished Goods 
 Account. 
 
 When goods are sold. Finished Goods Account is 
 credited with the cost, and Trading Account charged. 
 Ihis figure is what is known as" Cost of Sales." WTien 
 goods are returned, Trading Account is credited and 
 l^inished Goods charged with the cost of the returned 
 goods so that cost of sales will only be the cost of goods 
 actually sold. ^ 
 
 The reserve for overhead is charged or credited to 
 iradmg Account, so that the balance of the account is 
 the true gross profit on the goods sold. 
 
 The Continuous Production System. 
 
 A system for recording the costs of a continuous pro- 
 duct IS a much simpler one than a system for recording 
 the cost of job work, because in the former costs are 
 figured departmentally or by processes instead of by 
 jobs. The accounts are practically the same, except that 
 there is not the necessity for the same detailed analysis 
 as m the Job Cost System. ^ 
 
 The business must be departmentalised as the first 
 step, and the departmental divisions carefully observed 
 as otherwise true costs will not be obtained. The depart- 
 mental divisions are different from the job cost divisions, 
 as these should be by processes, regardless as to whether 
 the work is of similar character or not. 
 
 Material is handled in the same way in both systems as 
 
 far as purchases and delivery to stockroom goes, but in 
 
 a slightly different manner after it is requisitioned out 
 
 , "^"f ^ necessary to open a Material Account for each 
 
 department. As the material is withdrawn for use these 
 
 29 
 
 A 
 
 accounts are charged with its cost whether it be purchased 
 raw material or the finished product of some preceding 
 department. The credit to these accounts will be the 
 cost of the material used on the completed work, and the 
 balance will be the cost of the material used on the work 
 in process. 
 
 Labour is handled in the same manner as described in 
 the Job Cost System except that it is not necessary to 
 differentiate between direct and indirect labour. It is, 
 however, advisable to keep the direct and indirect labour 
 separate in order to get a detailed analysis of cost in each 
 department, so that any leaks which may exist will be 
 brought to light. All labour done in a department is 
 part of the cost of operation of that department and must 
 be taken up in the monthly cost sheets. There will be 
 some general labour, such as foremen, superintendents, 
 &c., whose work must be distributed over several depart- 
 ments. The basis for this distribution depends on the 
 nature of the business. It will be necessary to open 
 Departmental Labour Accounts which will be charged 
 with all labour and credited with the labour cost of the 
 completed material. The balance in these accounts will 
 represent the value of labour done on the work in process. 
 
 There should be also an Overhead Expense Account for 
 each department and these accounts will be charged with 
 their proportion of the fixed charges, with all indirect 
 material or supplies, and with all miscellaneous expense 
 items. The credit to these accounts will be the expense 
 incurred on the work completed, and the balance will be 
 the expenses incurred on the work in process. 
 
 At the end of the month a journal entry is made charg- 
 ing a succeeding Department Material Account, or the 
 Finished Goods Account, as the case may be, with the 
 total cost of the product sent out and crediting each of 
 the departmental accounts with its share of the total cost. 
 When this is done it will be seen that the sum of the 
 balances in these three departmental accounts — namely 
 Material, Labour, and Expense — will be the cost of the 
 work in process in that department. When a department 
 has completed all the work it has and sent its product to 
 some other department these three accounts should 
 balance. 
 
 In some lines of manufacture, where a continuous pro- 
 duct is made, it is the practice to issue a Works Production 
 Order to make a certain quantity of goods, and where 
 this practice is used the Job Cost System is used, keeping 
 the cost by order number. 
 
 After the goods have reached the Finished Goods 
 Account the method of treatment under the Continuous 
 Production System is identical with the Job Cost System. 
 
30 
 
 3» 
 
 Financial and Operating Statements. 
 
 The Profit and Loss statement should be so arranged as 
 to reflect the actual results of the period, and the figures 
 shown thereon should not need any explanation or 
 qualification. 
 
 For the purpose of giving the executive information as 
 to the operations of his factory it is well to prepare a 
 statement of factory operations. As all the figures are 
 from the books, the preparation of this statement involves 
 very little work and gives valuable information. 
 
 A statement of assets and liabilities should also be 
 prepared, and the difference between assets and liabihties 
 must be the figure shown on the Profit and Loss statement 
 as surplus or net profit. 
 
 WTiere goods are purchased for resale the Profit and 
 Loss statement should have another division showing the 
 amount of profit on purchased goods or merchandising 
 separate from the profit earned on manufactured goods. 
 Where this item is small it may be disregarded and merged 
 into manufactured goods, but the best practice is to keep 
 them separate. 
 
 The systems outlined are believed to be simple and 
 easy of operation. Wliile a number of details have been 
 explained it must be remembered that the methods 
 outhned are general, and it* is not claimed that the outlines 
 as given would fit every business. The one thing above 
 all others that both the manufacturer and the accountant 
 should have in mind in installing a system is simplicity. 
 Simplicity means ease of operation, less liability of error^ 
 and, what is equally important, economy of operation. 
 
 Ledger Accounts and Statements. 
 
 The following schedules show the Ledger Accounts 
 necessary, the trial balance before the closing entries are 
 made, and forms for a Profit and Loss statement, State- 
 ment of Factory Operations, and Balance Sheet. In order 
 to enable ready reference to be made to the various entries 
 numbers have been inserted showing the source of the 
 entry. WTiile the Ledger Accounts show the books as 
 closed, it is not recommended that this be done except 
 at the end of the fiscal year, as statements can be prepared 
 from the Ledger without the accounts being closed. 
 
 i 
 
 
 MATERIALS. 
 
 
 
 I. 
 
 Balance 
 
 Purchases . . (29) 
 Freight and Express (29} 
 
 S c. 
 
 3,000.00 
 
 7,800.00 
 
 284.32 
 
 11,084.32 
 
 Work in 
 Balance 
 
 Process 
 
 • • 
 
 (14) 
 
 $ c. 
 
 6,484.32 
 4600.00 
 
 
 11,084.32 
 
 Balance 
 
 4.600.00 
 
 
 
 
 LABOUR. 
 
 2. 
 
 
 
 1 '■ 
 i> c. 
 
 $ c. 
 
 Total Pay Roll . 
 
 • (29) 
 
 5,692.28 
 
 Balance 
 
 200.00 
 
 Balance . . 
 
 • • • 
 
 686.79 
 
 Work in Process (14) 
 Building Expense (3) 
 Power . . . . (4) 
 Repairs . . (3) 
 General Factory Es- 
 pen.se . . (9) 
 Factory Overhead — 
 
 4.444.67 
 185.00 
 300.00 
 356.40 
 
 92.60 
 
 
 
 
 
 
 
 
 Department A 10) 
 B II) 
 
 246.50 
 
 
 
 
 251.20 
 
 
 
 
 » C 12) 
 
 185.70 
 
 
 
 
 Shipping .. (21) 
 Balance 
 
 117.00 
 
 
 6.379f'7 
 
 6,379.07 
 
 
 
 686.79 
 
 
 P 
 
 tUILDING EXPENSK. 
 
 3. 
 
 
 $ c. 
 
 
 $ c. 
 
 Laljour . . 
 
 • '2) 
 
 185.00 
 
 General Factory Ex- 
 
 
 Power (Heat & Light) (4) 
 
 84.10 
 
 pense . . (9) 
 
 76.29 
 
 Insurance 
 
 • (5) 
 
 12.00 
 
 Factory Overhead — 
 
 
 Taxes 
 
 . (6) 
 
 20.00 
 
 Department A (10) 
 
 101.72 
 
 Depreciation 
 
 • (7) 
 
 40.00 
 
 B (II) 
 
 127.15 
 
 Repairs . . 
 
 . (8) 
 
 65.00 
 
 C (12^ 
 
 101.72 
 
 Elevator Expenses (29) 
 
 58.00 
 
 Shipping .. (21) 
 
 50.86 
 
 Water . . 
 
 • (29) 
 
 16.50 
 
 General Expense 
 
 
 Miscellaneous Materials 
 
 
 i (Office) (33) 
 
 50.86 
 
 
 (29) 
 
 28.00 
 
 
 
 
 508.60 
 
 508.60 
 
 
 
 POWER. 
 
 4- 
 
 
 
 S c. 
 
 
 $ c. 
 
 Labour . . 
 
 . (2) 
 
 300.00 
 
 Building Expense (3) 
 
 84.10 
 
 Insurance 
 
 • (5) 
 
 8.00 
 
 Factory Overhead — 
 
 
 Taxes 
 
 • (6) 
 
 10.00 
 
 Department A (10) 
 
 252.30 
 
 Depreciation 
 
 (?) 
 
 40.00 
 
 B (II) 
 
 336.40 
 
 Fuel 
 
 ■ (29) 
 
 325.00 
 
 C (12) 
 
 168.20 
 
 Oils 
 
 • (29) 
 
 45.00 
 
 
 
 Water . . 
 
 • '29) 
 
 38.00 
 
 
 
 Repairs &Suppli 
 
 es (29) 
 
 75.00 
 
 
 
 
 841.00 
 
 841.00 
 
 
 
 INSURANCE. 
 
 5. 
 
 
 $ c. 
 
 i 
 
 % c. 
 
 Accounts Payable (29) 
 
 828.00 
 
 ' Building Expense (3) 
 
 12.00 
 
 
 
 
 Power . . . . (4) 
 
 8.00 
 
 
 
 
 Repairs . . (8) 
 
 2.00 
 
 
 
 
 Factory Overhead — 
 
 
 
 
 
 Department A (10) 
 
 12.00 
 
 
 
 
 B (II) 
 
 16.00 
 
 
 
 
 C (12) 
 
 7.00 
 
 
 
 
 Shipping . . (21) 
 
 z.oo 
 
 
 
 
 General Exj^nse (23) 
 
 14.00 
 
 
 • • • 
 
 
 Balance 
 
 756.00 
 
 
 828.00 
 
 828.00 
 
 Balance . . 
 
 756.00 
 
 
 
32 
 
 
 
 TAXFS. 
 
 
 6. 
 
 
 
 1 c. 
 
 
 
 1 c. 
 
 Accounts Payable 
 
 (29) 
 
 1,095.00 
 
 Building Expense 
 
 (3) 
 
 20.00 
 
 
 
 
 Power 
 
 (4) 
 
 10.00 
 
 
 1 
 
 
 Repairs 
 
 (8) 
 
 2.50 
 
 
 1 
 
 
 Factory Overhead 
 
 
 
 
 
 
 E>epartment A 
 
 (10) 
 
 15C0 
 
 
 
 
 B 
 
 (II) 
 
 20.00 
 
 
 
 
 c 
 
 (12) 
 
 8.75 
 
 
 
 
 Shipping 
 
 (21) 
 
 1.25 
 
 
 
 
 General Expense 
 
 (23) 
 
 16.75 
 
 
 1 
 
 • • 
 
 
 Balance 
 
 
 1,000.75 
 
 
 1,095.00 
 
 1,095.00 
 
 Balance . . 
 
 1,000.75 
 
 
 GENERAL FACTORY EXPENSF. 
 
 1 
 
 DEPRECIATION RESER\ E. 
 
 
 7- 
 
 
 1 c. 
 
 
 
 1 c. 
 
 Balance 
 
 1,568.74 
 
 Balance 
 
 . 
 
 1,240.00 
 
 
 
 Building Expense 
 
 (3) 
 (4) 
 
 40.00 
 
 
 1 
 
 Power . . 
 
 40.00 
 
 
 
 Repairs 
 
 (8) 
 
 13-33 
 
 
 
 Factory Overhead 
 
 — 
 
 
 
 
 Department A 
 
 (10) 
 
 75-00 
 
 
 
 B 
 
 (11) 
 
 100.00 
 
 
 
 . •• C 
 
 tr2) 
 
 43.75 
 
 
 
 Shipping 
 
 (21) 
 
 8.33 
 
 
 , , j 
 
 General Expense 
 Balanrp 
 
 (2 3> 
 
 8.33 
 
 
 1,568.74 
 
 1,568.74 
 
 
 
 1,568.74 
 
 
 
 REPAIRS. 
 
 8. 
 
 
 
 % c. 
 
 
 % c. 
 
 Labour . . 
 
 .. (2) 
 
 356.40 
 
 Building Expense (3) 
 
 65.00 
 
 Insurance 
 
 .. (5) 
 
 2.00 
 
 Factory Overhead — 
 
 
 Taxes 
 
 .. (6) 
 
 2.50 
 
 Department A (10^ 
 
 159-00 
 
 Depreciation 
 
 .. (7) 
 
 13-33 
 
 B (II) 
 
 247.80 
 
 Supplies . . 
 
 • - (29) 
 
 167.00 
 
 C (12) 
 
 "5-4 3 
 
 Miscellaneous 
 
 Expense 
 (29) 
 
 48.00 
 
 Shipping .. (21) 
 
 3.00 
 
 
 589.23 
 
 589.23 
 
 
 
 
 
 9 c. 
 
 1 
 
 % c. 
 
 Labour . . (2) 
 
 92.60 
 
 Factory Overhead — 
 
 
 Building Expense (3) 
 Factory Office Expense 
 
 7629 
 
 Department A (10) 
 
 155-90 
 
 
 B (II) 
 
 207.79 
 
 (29) 
 
 265.00 
 
 C (12) 
 
 104.30 
 
 Miscellaneous Expense 
 
 
 
 
 (29) 
 
 141.00 
 
 
 
 Miscellaneous Supplies 
 
 
 
 
 (29) 
 
 20.00 
 
 
 
 
 467.99 
 
 467.09 
 
 
 
 
 1 
 
 33 
 
 FAC'iORY OVK KHKAD, DEPT. A. 
 
 10. 
 
 
 % c. 
 
 
 1 c. 
 
 Indirect Labour (2) 
 
 246.50 
 
 Work in Process, 1,802 
 
 
 Building Expense (3) 
 
 101.72 
 
 Hours, at 67 cents 
 
 
 Power (4) 
 
 252.30 
 
 (14) 
 
 1.207.34 
 
 Insurance . . (5) 
 
 12.00 
 
 
 
 Taxes . . . . (6) 
 
 15.00 
 
 
 
 Depreciation . . (7) 
 
 75.00 
 
 
 
 Repairs . . (8) 
 
 159.00 
 
 
 
 General Factory Expense 
 
 
 
 
 (9) 
 
 15590 
 
 
 
 Miscellaneous — 
 
 
 
 
 Supplies . . {29) 
 
 30.00 
 
 
 
 Expense . . (29) 
 
 75.60 
 
 
 
 Reserve for Overhead (ij) 
 
 1,207.34 
 
 
 
 
 1,207.34 
 
 
 
 
 
 FACTORY OV^ERHEAD, DEPT. B. 
 
 II. 
 
 
 
 $ c. 
 
 
 % c. 
 
 Indirect Labo 
 
 or (2) 
 
 251.20 
 
 Work in Process, 2,523 
 
 
 Building Expense (3) 
 
 127.15 
 
 Hours, at 52 cents 
 
 
 Power 
 
 • (4) 
 
 336.40 
 
 (14) 
 
 1,311.96 
 
 Insurance 
 
 .- (5) 
 
 16.00 
 
 Reserve for Overhead 
 
 
 Taxes . . 
 
 . (6) 
 
 20.00 
 
 {13) 
 
 119.78 
 
 Depreciation 
 
 .. (7) 
 
 100.00 
 
 
 
 Repairs . . 
 
 (8) 
 
 247.80 
 
 
 
 General Factory 
 
 Expense 
 (9) 
 
 207.79 
 
 
 
 Miscellaneous — 
 
 
 
 
 
 Supplies 
 
 . (29) 
 
 40.00 
 
 
 
 Expense 
 
 - (29) 
 
 85.40 
 
 
 
 
 1. 431-74 ' 
 
 i.43i-7t 
 
 
 
 1 
 
 
 
 FACTORY OVERHEAD, DEPT. C. 
 
 12. 
 
 
 
 S c. 
 
 
 % c. 
 
 Indirect Labour 
 
 (2) 
 
 185.70 
 
 Work in Process, 4,418 
 
 
 Building Expense 
 
 (3) 
 
 101.72 
 
 Hours, at 15 cents 
 
 
 Power 
 
 (4) 
 
 168.20 
 
 (14) 
 
 662.70 
 
 Insurance 
 
 (5) 
 
 7.00 
 
 Reserve for Overhead 
 
 
 Taxes 
 
 (6) 
 
 8.75 
 
 {13) 
 
 ^^57-^5 
 
 Depreciation 
 
 (7) 
 
 43-75 
 
 
 
 Repairs 
 
 (8) 
 
 115-43 
 
 
 
 General Factory Expense 
 
 
 
 
 
 (9) 
 
 104.30 
 
 
 
 Miscellaneous — 
 
 
 
 
 
 Supplies 
 
 (29) 
 
 20.00 
 
 
 
 Expense 
 
 (29) 
 
 61.50 
 
 
 
 
 816.35 
 
 816.35 
 
 
 
 
34 
 
 <^ 
 
 35 
 
 RESERVE FOR OVERHEAD. 
 
 13. 
 
 Factory Overhead — 
 Department B (ii) 
 
 C (12) 
 
 $ c. 
 
 iiq.78 
 15365 
 
 Factory Overhead — 
 Department A (10) 
 Trading . . {30) 
 
 % c. 
 
 84.32 
 iSg.ix 
 
 
 273-43 
 
 
 27343 
 
 
 
 
 
 
 WORK IN 
 
 PROCESS. 
 
 14. 
 
 
 
 % c. 
 
 
 f c. 
 
 Balance . . 
 
 , , 
 
 2,000.00 1 
 
 Finished Goods (15) 
 
 12,086.13 
 
 Material 
 
 (1) 
 
 6,484.32 • 
 
 Balance 
 
 4,024. se 
 
 Labour . . 
 
 (2) 
 
 4.444 •67 1 
 
 
 
 Factory Overhead- 
 
 
 
 
 
 Department A 
 
 (10) 
 
 1,207.34 
 
 
 
 B 
 
 (11) 
 
 1.311.96 
 
 
 
 c 
 
 (12) 
 
 662.70 \ 
 
 
 
 
 l6.110.9q 
 
 16,110.90 
 
 Balance . . 
 
 4,024.86 
 
 
 
 
 FINISHED GOODS. 
 
 15- 
 
 Balance . . 
 Work in Process 
 ■Cost of Returns 
 
 (14) 
 (20) 
 
 % c. 
 
 3. 7 54 00 
 
 12,086.13 
 
 59712 
 
 Trading (cost of sales) 
 Balance 
 
 1 c. 
 
 8-801.53 
 7.635-72 
 
 
 16,437-25 
 
 16,437.25 
 
 Balance . . 
 
 7.635-72 
 
 
 OUTBOITND FREIGfTT. 
 
 Accounts Payable (29) 
 
 $ c. 
 i::o.oo 
 
 Sales 
 
 ii(] 
 
 19. 
 
 5 c. 
 120.00 
 
 TRADING. 
 
 "O. 
 
 Cost of Sales .. (15) 
 Reserve for Overhead 
 
 (13) 
 Profit and Loss . . Isf) 
 
 S r.. 
 S,8oi.53 
 
 i8q.ii 
 4,056. 8fi 
 
 T 3.04 75'' 
 
 Cost of Returns (15) 
 Sales . . . . (16) 
 
 SHIPPING. 
 
 » c. 
 
 597"12 
 12,450.40 
 
 13,047.52 
 
 2\ . 
 
 
 
 $ c. 
 
 
 $ c. 
 
 Labour . , 
 
 (2) 
 
 117.00 
 
 Profit and Loss (27) 
 
 237-19 
 
 Building Expense 
 
 (^) 
 
 50.86 
 
 
 
 Insurance 
 
 !3) 
 
 1. 00 
 
 
 
 Taxes 
 
 (f>) 
 
 1-25 
 
 
 
 Depreciation 
 
 (7) 
 
 8-33 
 
 
 
 Repairs 
 
 (8) 
 
 2.00 
 
 
 
 Miscellaneous — 
 
 
 
 
 
 Supplies 
 
 (29) 
 
 50.00 
 
 
 
 Expense 
 
 (29) 
 
 6.75 
 
 1 
 1 
 
 i 
 
 
 
 :^37.i9 
 
 237-19 
 
 
 
 
 1 
 
 
 SALES. 
 
 16. 
 
 Sales Returns .. (17) 
 
 Sales Allowances (18) 
 
 Out Freight . . (19) 
 
 Trading . . {20) 
 
 $ c. 
 
 865.20 
 
 50.00 
 
 120.00 
 
 12,450.40 
 
 13,485.60 
 
 Accounts Receivable 
 
 (28) 
 
 1 c. 
 13,485.60 
 
 13,485.60 
 
 
 
 SALES RETURNS. 
 
 
 17. 
 
 1 
 Accounts Receivable (28) ' 
 
 $ c. 
 
 865.20 
 
 Salts 
 
 .. {16) 
 
 1 c. 
 365.20 
 
 I 
 
 
 
 SALES ALLOWANdiS. 
 
 Accounts Receivable (2S ) 
 
 $ c. 
 
 50.00 
 
 Sale:i 
 
 (/6) 
 
 18. 
 
 S c. 
 
 50.00 
 
 Salaries 
 
 Commissions 
 
 Advertising 
 
 SELLING E.XrKNSE. 
 
 (29) 
 
 (29) 
 (20^ 
 
 s 
 
 Soo 
 
 c. 
 00 
 
 200.00 1 
 
 120 
 
 53 
 
 1,120 
 
 53 
 
 
 
 Profit and Losi (27) 
 
 GENER.\I i:XPENSF. 
 
 Building Expense 
 Insurance 
 Taxes 
 
 I>Bpreciatioti 
 Officers' Salaries 
 Office Salaries . . 
 Delivery Expense 
 Miscellaneous Exj^ense 
 
 
 S c. 
 
 (3) 
 
 50.86 
 
 (5) 
 
 14.00 
 
 (6) 
 
 16.75 
 
 (7) 
 
 8.33 
 
 (29) 
 
 .100.00 
 
 (29) 
 
 ^00.00 
 
 (20^ 
 
 i«6..t3 
 
 (29) 
 
 204.30 
 
 
 1,180.67 
 
 
 
 Piofit and Loss 
 
 S c. 
 
 1.120.53 
 
 » c. 
 
 (37' !.iSo.67 
 
 i,tHo.67 
 
 A 
 
 (I 
 
36 
 
 DISCOUNT ON PURCHASES. 
 
 2i. 
 
 Profit and Less .. (27) 
 
 f c. 
 
 165.10 
 
 Accounts Payable 
 
 (21) 
 
 f C 
 
 165.40 
 
 
 
 
 DISCOUNT ON SALES. 
 
 
 25. 
 
 $ c. 
 Accounts Receivable (28) 9500 
 
 Profit and Losi 
 
 [2:') 
 
 S c. 
 
 95.00 
 
 
 
 RESERVE FOR BAD DEBTS. 
 
 
 26. 
 
 Accounts Receivable (28* 
 Balance 
 
 s •.. 
 
 6|.00 
 131.00 
 
 j Balance 
 Profit and Lost 
 
 f^aUnce 
 
 (^7) 
 
 $ c. 
 
 125.00 
 jn.oo 
 
 
 195.00 
 
 195.00 
 
 
 
 r^'.oo 
 
 PROFIT AND LOSS. 
 
 
 27. 
 
 1 % c. 
 Shipping ., ax) a37-i9 
 Selling .. .. (22) x,iao.53 
 General Expense 23) 1,180.67 
 Discount on Sales 25) 95.00 
 Reserve for Bad Debts 
 
 (26) 70.00 
 Net Profit to Surplus {36) 1,518.89 
 
 Trading 
 
 Discount on Piirrl 
 
 '20' 
 
 t-'J 
 
 1 c. 
 4.056.88 
 
 165.40 
 
 
 4.222.28 
 
 
 4,222.28 
 
 
 
 ACCOUNTS RECEIVABLE. 
 
 
 28. 
 
 Balance 
 
 Sales .. .. (16; 
 
 % c. 
 6,000,00 
 
 13.485.60 
 19,485.60 
 
 Cash . , 
 
 Returns 
 
 Sales Allowances 
 
 Discount on Sales 
 
 Bad Debts . . 
 
 Balance 
 
 i 
 
 {30) 
 (17) 
 (18) 
 
 (25) 
 (26) 
 
 $ c. 
 
 Q.87500 
 
 865.20 
 
 50.00 
 
 9500 
 
 64.00 
 
 8,5 3" -^o 
 
 
 19,485.60 
 
 Balancs 
 
 S,536.40 
 
 
 ACCOUNTS PAYABLE. 
 
 
 29- 
 
 Cash .. .. {30) 
 
 Discount on Pvu-chaset? 
 
 (241 
 
 Balance 
 
 15.350-50 
 
 165.40 
 10,233-81 
 
 1 Balance 
 
 ; Accounts Payable 
 
 ] glister 
 
 Ke- 
 
 1 c. 
 
 6,250.00 
 
 19^99-71 
 
 25,749-71 
 
 Balance 
 
 25.749.71 
 
 
 10,233.81 
 
 ? 
 
 ( 
 
 37 
 
 CASH. 
 
 30. 
 
 « c. 
 
 Balance .. .. '30) I i7,oti.oo 
 
 Accounts Receivable (28) 9,87500 
 
 Balance 
 
 Balance 
 
 Balance . 
 
 Balance 
 
 Balance 
 
 26,93'i.oo 
 
 * c 
 
 Accounts Payable (29; | 15.350.50 
 
 11.585.50 
 
 Balance 
 
 11,585-50 
 
 LAND. 
 
 4,Oon.oo 
 
 BUILDINC.S. 
 
 3 C'. 
 12,000.00 
 
 MACHINERY AND EQUIPMENT. 
 
 > 1 . 
 50,000.00 
 
 CAPITAL STOCK. 
 
 UNISSUED STCK K. 
 
 Si c. 
 15,000.00 
 
 SURPLUS. 
 
 26,936.00 
 
 3»- 
 
 32- 
 
 33. 
 
 34- 
 
 « c. 
 
 100,000.00 
 
 35. 
 
 36. 
 
 Balance 
 
 ::> c. 
 6,518.89 
 
 Balance 
 . Profit and Loss 
 
 I3alance 
 
 (27) 
 
 • 
 
 * c. 
 
 5,000.00 
 1,518.89 
 
 
 6,518.89 
 
 6.518.89 
 
 
 
 6,518.89 
 
 > 
 
3» 
 
 f 
 
 39 
 
 TRIAL BALANCE (before closini;) jASfARV ^ist iqi6. 
 
 
 
 
 % c. 
 
 S C. 
 
 I 
 
 Materials 
 
 
 4,600.00 
 
 
 2 
 
 Labour . . 
 
 
 
 686.79 
 
 5 
 
 Insurance 
 
 
 756.00 
 
 
 6 
 
 Taxes 
 
 
 1,000.75 
 
 
 7 
 
 Depredation Keserve . . 
 
 
 
 i.'n68.74 
 
 lO 
 
 Factorv Overhead, Dept. A . 
 
 
 
 84.32 
 
 II 
 
 B . 
 
 
 119.78 
 
 
 \z. 
 
 c . 
 
 
 I53.<>5 
 
 
 u 
 
 Work ill Process 
 
 
 4,024.86 
 
 
 15 
 
 Finished Goods . . 
 
 
 7.635-72 
 
 
 i6 
 
 Sales 
 
 
 
 13, 485. 60 
 
 »7 
 
 Sales Returns 
 
 
 S65.20 
 
 
 i8 
 
 Sales Allowances 
 
 
 50.00 
 
 
 19 
 
 C>utbouiid Freight 
 
 . 
 
 120.00 
 
 
 20 
 
 Trading 
 
 
 ■S. 204.4 1 
 
 
 21 
 
 Shipping 
 
 
 237.19 
 
 
 22 
 
 SelUne Expense 
 
 
 1. 120.53 
 
 
 23 
 
 General Expense 
 
 
 1,180.67 
 
 
 24 
 
 Discount on Purchases . . 
 
 
 
 165.40 
 
 23 
 
 Discount on Sales 
 
 ' • 9500 
 
 
 26 
 
 Rese^^'e for Bad Debts . . 
 
 . 1 
 
 61.00 
 
 28 
 
 Accounts Receivable , . 
 
 • 1 •'^,536.40 
 
 
 29 
 
 Accounts Pavable 
 
 
 10,233.81 
 
 30 
 
 Cash 
 
 . 
 
 11,585.50 
 
 
 3J 
 
 Land 
 
 
 4,000.00 
 
 
 32 
 
 Buildings 
 
 
 12,000.00 
 
 
 33 
 
 Machinery and Equipment 
 
 
 s 0,000. 00 
 
 
 34 
 
 Capital Stock 
 
 
 
 100,000.00 
 
 35 
 
 Unissued Stock 
 
 
 15,000.00 
 
 
 36 
 
 Surplus 
 
 • 
 
 
 5,000.00 
 
 
 
 
 131.285.66 
 
 1 31, 28';. 66 
 
 STATEMENT OF FACTORY OPERATIONS. 
 For the Month ended 31ST January 1916. 
 Summary of Factory Operations. 
 
 Material— 
 
 Inventory at ist of Month 
 
 Purchases 
 
 Freight and Express In 
 
 Total 
 
 Lest Inventory at end of Month 
 
 Direct Material Used 
 Direct Labour 
 
 Factory Overhead, per detail below 
 Department A 
 
 ,, -tj • • • • 
 
 C 
 
 Total Factory Overhead .. 
 
 Total Material, Labour, and Overhead 
 Add Inventory, ist of Month : — 
 Work in l*roc«ss 
 Finished Goods 
 
 Less Inventory at End of Month : — 
 Work in Process 
 Finished Goods 
 
 Cost of Sales, per Profit and Loss Statement 
 
 S3,ooo.oo 
 
 7,800.00 
 
 284.32 
 
 11,084.32 
 4,600.00 
 
 1,207.34 
 
 l,3".96 
 6620.7 
 
 2, 000.00 
 3,754.00 
 
 4,024.86 
 7,635.72 
 
 $6,484.32 
 4,444-67 
 
 3,182.00 
 14,110.99' 
 
 5,754-00. 
 19,864.99 
 
 11,660.58 
 8,204.41 
 
 SU.MMARY OF FACTORY OVERHEAD. 
 
 PROFIT AND loss STATEMENT for Month FvniNr, f am arv 31 t()i6. 
 
 Gross Sales 
 
 Sales Returns 
 Sales .Allowances 
 Outbound Freight 
 
 Net Sales . . 
 Cost of Sales . . 
 Reser\-p for Overhea<l 
 
 Gross Profit 
 Shipping 
 Selling Expense 
 General Expense 
 Discount on Sak>? 
 Bad Debts . . 
 
 Net Earnings 
 Discount on Purchases 
 
 (24) 
 
 
 $ c. 
 
 $ c. 
 
 - (16) 
 
 
 13,485.60 
 
 • (17) 
 
 8«.5.20 
 
 
 (18) 
 
 50.00 
 
 
 (19) 
 
 I :?o.oo 
 
 
 
 
 1,035.20 
 
 . 
 
 12.450.40 
 
 (20) 
 
 s. 204 ,4 1 
 
 
 . ^i.V 
 
 189. II 
 
 X.303-52 
 
 
 
 . 
 
 4,056.88 
 
 . (Ji) 
 
 237.19 
 
 
 (221 
 
 1. 120.53 
 
 
 . (2i) 
 
 1.180.67 
 
 
 ■ (25) 
 
 9500 
 
 
 . (26) 
 
 70.00 
 
 
 Net Profit 
 
 2,703.39 
 
 1,353.49 
 165.40 
 
 1,518.89 
 
 Nature of Expense 
 
 Building Expense 
 
 Power.. 
 
 Depreciation . . 
 
 Insurance 
 
 Taxes 
 
 Shop Repairs . . 
 
 General Factory Ex 
 
 pense 
 Miscellaneous Sup 
 
 plies 
 Indirect Labour 
 Miscellaneous £x 
 
 pense 
 
 Total 
 
 Adjustment in De- 
 partment Overhead 
 
 Total Factory Over- 1 
 head as above 
 
 
 Depart- 
 
 Depart- 
 
 Total 
 
 ment .\ 
 
 ment B 
 
 $ c. 
 
 S c. 
 
 $ c. 
 
 330.59 
 
 101.72 
 
 127.15 
 
 756.90 
 
 252.30 
 
 336.40 
 
 218.75 
 
 75.00 
 
 100.00 
 
 35.00 
 
 12.00 
 
 16.00 
 
 43-75 
 
 15.00 
 
 20.00 
 
 522.23 
 
 159-00 
 
 217.80 
 
 467.99 
 
 90.00 
 683.40 
 
 222.50 
 
 3,371.11 
 189. II 
 
 3,182.00 
 
 155.90 
 
 30 00 
 240.50 I 
 
 75.60 
 
 1,123.02 
 84-32 
 
 1,207.34 
 
 207.7'> 
 
 40.00 
 251.20 
 
 85^*0 
 
 1,431-74 
 X19.7S 
 
 1. 311.9'') 
 
 Depait- 
 ment C 
 
 $ c. 
 
 101.72 
 168.20- 
 
 43-75 
 7.00 
 
 8.75 
 
 115.43 
 
 104.30 
 
 20.00 
 185.70 
 
 61.50 
 
 816.35 
 
 153-65 
 
 662.70 
 
40 
 
 BAT.ANCE SHEET, 31ST jAxrxRY 1916. 
 
 > 
 
 Current Assets — 
 
 Cash 
 
 Arxounts Receivable 
 Less Reserve for Bad 
 
 (30) 
 
 (28) 
 
 Debts 
 
 (26) 
 
 (I) 
 (14) 
 (I5> 
 
 • • 
 
 (5) 
 (6) 
 
 <8, 5 36.40 
 131.00 
 
 $ii.585-50 
 
 8.405.40 
 4.600.00 
 4,024.86 
 7,635.72 
 
 756.00 
 1,000.75 
 
 
 Raw Materials . . 
 Work in Process . . 
 Finished Goods . . 
 
 I'otal Current Assets 
 Deferred .Assets — 
 Prepaid Insurance 
 Prepaid Taxes . . 
 
 ■ • • • 
 
 536,251.48 
 
 Total Deterred Assets 
 Capital Assets — 
 
 Land . . . . . . (3^) 
 
 lluildins;s . . (32) 
 
 Machinery and Mquipinent {33) 
 
 Less Depreciation Reserve (7) 
 
 4,000.00 
 
 1,756.75 
 
 12,000.00 
 50,000.00 
 
 62,000.00 
 1,568.74 
 
 60,431.26 
 
 Total Capital Assets 
 
 • • 
 
 .. 
 
 10,233.81 
 686. 7Q 
 
 64,431-26 
 
 Total Assets 
 
 102,439.49 
 
 
 (29) 
 (2) 
 
 • • 
 
 (34) 
 (35) 
 
 (36) 
 
 • • 
 
 • • • • 
 
 100,000.00 
 15,000.00 
 
 
 Current Liabilities— 
 .\ccoiinls Payable 
 Accrued Wages . . 
 
 
 Total Current Liabilities 
 Capital Liabilities — 
 Capital Stock 
 
 Les% I'liisstied Stock 
 
 Surplus 
 
 85,000.00 
 5,000.00 
 
 10,920.60 
 
 Total Capital Liabilities 
 Net Profit for Month 
 
 
 90,000.00 
 1,518.89 
 
 $102,439.49 
 
 
 
 i 
 
 1 
 
 Uses and Advantages of a Cost System. 
 
 The prime object of a cost system is to determine costs, 
 to analyse and compare them, and to use them as a basis 
 for making prices. But the uses and advantages go 
 further. A manufacturer from rehable records is able 
 to make clearer and more intelligent statements to his 
 bank and thereby obtain a larger line of credit than he 
 could without them. 
 
 Better Direction of Sales Force. 
 
 In almost every line of manufacture there are some 
 classes of work done on which the manufacturer loses 
 money. This may be due to the high cost in his own plant, 
 or it may be due to the fact that some competitor is better 
 equipped to make that particular aiticle. A cost system 
 
 i 
 
 41 
 
 will bring out these facts and will show the manufacturer 
 which lines he should push. Salesmen, like everyone else, 
 are prone to follow the line of least resistance. In sales- 
 manship the line of least resistance is selling the goods 
 which require the least effort, and in nearly every instance 
 the goods which require the least effort to sell are the least 
 profitable lines. If the selling force know that a line of 
 goods produces little or no profit, and are told to use every 
 effort to push another line, the result will be apparent in 
 the Profit and Loss Account. 
 
 Still other manufacturers have customers on their books 
 to whom they have been selling for years, and have been 
 giving some reduction in price or some concession in the 
 way of extra work. A number of these accounts are 
 decidedly unprofitable, and a cost system will bring the.se 
 to light and put the manufacturer either in a position to 
 raise his prices to a profitable basis or let someone else 
 have the unprofitable business. 
 
 Elimination of Waste. 
 
 In every manufacturing business there are bound to 
 occur leaks, either of material, labour, or expense. If 
 statistics are kept showing the amount of material 
 necessary to do certain classes of work, the amount of 
 labour, and the amount of overhead expense, an increase 
 in any of these items will be revealed by a comparison, 
 and the executive will be in a position to take the matter 
 up for investigation. It is hardly necessary to say that 
 after a few of these matters have been taken up with the 
 factory the factory people will use a little more care, not 
 only in the use of the material but in the time they spend 
 on the work. A cost system with forms properly designed 
 for giving statistical information is of the greatest aid 
 to factory efficiency. 
 
 Cost System an Investment, not an Expense. 
 
 A system will not run itself ; neither will it in itself 
 reduce costs nor increase efficiency. This is strictly up 
 to the manufacturer himself. A system wall give him the 
 information, and if this information is properly used, he 
 will unquestionably find that his system is not an item of 
 expense, but a very valuable asset. 
 
 If a manufacturer purchases a new machine before his 
 old one is worn out, he does so because he expects the 
 amount expended to increase his profits either from 
 economy in operation or from an increase in production. 
 He looks on this as an investment and not an expense. 
 Office methods have been improved to quite as larg« an 
 extent as machinery, and an investment in improved 
 methods will produce a return just as will an investment 
 in improved machinery. 
 
 HP 
 
INTENTIONAL SECOND EXPOSURE 
 
 40 
 
 BAT AXCF SHEET, 31ST Javt-arv igi6. 
 
 Cum-nt Assets — 
 
 Cash (30) 
 
 Accounts Receivable . . (28) 
 Less Reserve for Bad Debts 
 
 (26) 
 
 Raw Materials .. .. (i) 
 Work in Process . . . . (14) 
 Finished Goods .. .. (15^ 
 
 Total Current Assets 
 Deferred Assets — 
 
 Prepaid Insurance . . (5) 
 
 I'repaid Taxes . . . . (6) 
 
 Total Deterred Assets 
 Capital Assets — 
 
 Land (31) 
 
 ]iuildinfi:s . . . . (32) 
 
 Machinery and i;quipn»cnt (33) 
 
 Less Depreciation Reserve (7) 
 
 58,536.40 
 131.00 
 
 $11,585.50 
 
 8.405.40 
 4,600.00 
 4,024.86 
 7.635-72 
 
 12,000.00 
 50,000.00 
 
 62,000.00 
 1,568.74 
 
 756.00 
 1,000.75 
 
 4,000.00 
 
 60,431.26 
 
 Total Capital Assets 
 
 Total .Assets . . . . . . . . 
 
 Current Liabilities — 
 
 .Accounts Payable .. (29) 10,233.81 
 
 Accrued Wages . . . . (2) 686.70 
 
 Total Current Liabilities 
 Capital Liabilities — 
 
 Capital Stock .. .. (34) 100,000.00 
 y^i-ss Unissued Stock (35) 15,000.00 
 
 85,000.00 
 
 Surplus (36) 5,000.00 
 
 Total Capital Liabilities 
 
 Net Profit for Month 
 
 $36,251.48 
 
 1.756.7.') 
 
 64,431.26 
 102,439.49 
 
 10,920.60 
 
 90,000.00 
 1,518.89 
 
 SI02.439-49 
 
 Uses and Advantages of a Cost System. 
 
 The prime object of a cost system is to determine costs, 
 to analyse and compare them, and to use them as a basis 
 for making prices. But the uses and advantages go 
 further. A manufacturer from reliable records is able 
 to make clearer and more intelligent statements to his 
 bank and thereby obtain a larger line of credit than he 
 could without them. 
 
 Better Direction of Sales Force. 
 
 In almost every line of manufacture there are some 
 classes of work done on which the manufacturer loses 
 money. This may be due to the high cost in his own plant, 
 or it may be due to the fact that some competitor is better 
 equipped to make that particular aiticle. A cost system 
 
 iff 
 
 iM 
 
 
 41 
 
 i> 
 
 will bring out these facts and will show the manufacturer 
 which lines he should push. Salesmen, like everyone else, 
 are prone to follow the line of least resistance. In sales- 
 manship the line of least resistance is selling the goods 
 which require the least effort, and in nearly every instance 
 the goods which require the least effort to sell are the least 
 profitable lines. If the selling force know that a line of 
 goods produces little or no profit, and are told to use every 
 effort to push another line, the result will be apparent in 
 the Profit and Loss Account. 
 
 Still other manufacturers have customers on their books 
 to whom they have been selling for years, and have been 
 giving some reduction in price or some concession in the 
 way of extra work. A number of these accounts are 
 decidedly unprofitable, and a cost system will bring these 
 to light and put the manufacturer either in a position to 
 raise his prices to a profitable basis or let someone else 
 have the unprofitable business. 
 
 Elimination of Waste. 
 
 In every manufacturing business there are bound to 
 occur leaks, either of material, labour, or expense. If 
 statistics are kept showing the amount of material 
 necessary to do certain classes of work, the amount of 
 labour, and the amount of overhead expense, an increase 
 in any of these items will be revealed by a comparison, 
 and the executive will be in a position to take the matter 
 up for investigation. It is hardly necessary to say that 
 after a few of these matters have been taken up with the 
 factory the factory people will use a little more care, not 
 only in the use of the material but in the time they spend 
 on the work. A cost system with forms properly designed 
 for giving statistical information is of the greatest aid 
 to factory efficiency. 
 
 Cost System an Investment, not an Expense. 
 
 A system will not run itself ; neither will it in itself 
 reduce costs nor increase efficiency. This is strictly up 
 to the manufacturer himself. A system will give him the 
 information, and if this information is properly used, he 
 will unquestionably find that his system is not an item of 
 expense, but a very valuable asset. 
 
 If a manufacturer purchases a new machine before his 
 old one is worn out, he does so because he expects the 
 amount expended to increase his profits either from 
 economy in operation or from an increase in production. 
 He looks on this as an investment and not an expense. 
 Office methods have been improved to quite as large an 
 extent as machinery, and an investment in improved 
 methods will produce a return just as will an investment 
 in improved machinery. 
 
•■ ".■* 
 
 42 
 
 One of the strongest arguments in favour of installing 
 a practical cost system is the fact that every manufacturer 
 who has installed one and who has operated it for at least 
 a year is firmly convinced that it is a paying proposition. 
 
 The Federal Trade Commission is urging manufacturers 
 to give the subject of accurate costs the attention it 
 deserves. It has found that unreliable costs of produc- 
 tion and distribution cause a great deal of unfair competi- 
 tion and a heavy business death rate. 
 
 While the claim is not made that a cost system will 
 save a man from failure, the claim is made that a man who 
 knows where he stands day by day is very much less 
 likely to make a failure of his business than one who is 
 directing his business by guesswork. 
 
 
 J 
 
 «l 
 
 ■i 
 
 
 if- > 
 
 ' . it 
 
 
 
 ■rar^ "' T 
 
 * 
 
 
 aliiiiiii 
 
 -^vj 
 
 ■'' ^ 
 
 iMiM 
 
 
NEH 
 
 JAN 1 2I99S 
 
 COLUMBIA UNIVERSITY LIBRARIES 
 
 I 
 
 0044243367 
 
 I 
 
 PP^: 
 
;«: 
 
END OF 
 TITLE